Relative Performance or Team Evaluation? Optimal Contracts for Other-Regarding Agents

Bartling, Björn

doi:10.2139/ssrn.1014030

Cited by 26 publications

(30 citation statements)

References 26 publications

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“…In this section, we discuss the effects that the degree of complementarity of efforts, the efficiency of the EN's efforts and the VC's efforts, and the fairness preference of the EN all have on the dynamics of the effort best-response functions and on the optimal equity participation level expressed in (22). Inspired by [7], we simulate (22) by assuming a Constant Elasticity of Substitution (CES) project revenue function, which has the following specification:…”

Section: Model Analysismentioning

confidence: 99%

“…By using a continuous-effort model of Holmstrom [20], Englmaier and Wambach [21] set up a model where an agent has an inequality-averse preference, which is a variant of the Fehr-Schmidt preference, and provide a comprehensive treatment of the moral hazard problem under inequality aversion. Bartling [22] analyzes a principalmultiagent model and assumes that the agents have inequity aversion or status preferences. Luo, Wang, and Li [23] apply the agency model in the social network setting, study the impact of an inequity-averse agent's deserved concerns on her behaviors, and derive the optimal output sharing.…”

Section: Introductionmentioning

confidence: 99%

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Venture Capital Contracting with Double-Sided Moral Hazard and Fairness Concerns

Chang

2018

Mathematical Problems in Engineering

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The development of new venture enterprise is the result of joint efforts of entrepreneurs and venture capitalists who collaborate based on complementary resources. In this paper, we analyze a venture capital incentive contracting model in which a venture capitalist interacts with an entrepreneur who is risk neutral and fairness concerned, offering him an equity contract. We solve the venture capitalist’s maximization problem in the presence of double-sided moral hazard. Our results show that fairness concerns change the structure of the optimal contract. More importantly, we show that the solution to the contract regarding the optimal share given to the entrepreneur is nonlinear and is a fixed point between 0 and 1. Further, we simulate the model under the assumption that venture project’s revenue is a Constant Elasticity of Substitution (CES) function and obtain the following results. (1) When the two efforts are complementary, the venture capitalist’s effort does not monotonically decrease in the share allocated to the entrepreneur, while the entrepreneur’s effort does not monotonically increase in his share. (2) Relative to the benchmark case where the entrepreneur is fairness neutral, the optimal equity share allocated to the fair-minded entrepreneur is larger than 1/2, and as the degree of efforts complementarity increases, the optimal equity share tends to 60%. In this scenario, for a given efforts substitution parameter, the fair-minded entrepreneur provides a higher effort level than the venture capitalist.

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Section: Model Analysismentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Venture Capital Contracting with Double-Sided Moral Hazard and Fairness Concerns

Chang

2018

Mathematical Problems in Engineering

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“…Finally, as a different behavioral approach to study team incentives, multi‐agent moral hazard models with social preferences have been developed. In the literature, social preferences are characterized by inequity aversion (Itoh, 2004; Englmaier and Wambach, ; Bartling, ), envy (Bartling and Siemens, ), or status seeking (Bartling, ). They show that, even though IPE would be optimal for purely self‐interested agents, team incentives can be optimal.…”

Section: Related Literaturementioning

confidence: 99%

Team Incentives and Reference‐Dependent Preferences

Murooka

2016

Economics Manag Strategy

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We investigate a multi-agent moral-hazard model where agents have expectation-based referencedependent preferencesà la Rabin (2006, 2007). We show that even when each agent's probability of success in a project is independent, a principal may employ team incentives. Because the agents are loss averse, they have first-order risk aversion to wage uncertainty. This causes the agents to work harder when their own failure is stochastically compensated through other agents' performance. In the optimal contract, agents with high performance are always rewarded, whereas agents with low performance are rewarded if and only if other agents' performance is high.

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“…The concept of inequity aversion appears in numerous theoretical studies of optimal incentives within teams and firms. Demougin and Fluet (2003), Bartling and von Siemens (2004), Dur and Glazer (), Demougin et al (), Goel and Thakor (2006), Englmaier and Wambach (2010), Neilson and Stowe () and Bartling () all base their models on the approach proposed by Fehr and Schmidt (). While their qualitative findings for other environments are basically in line with ours, we identify additional drivers behind the results in our managerial compensation setting.…”

Section: Literature Reviewmentioning

confidence: 99%

How to Pay Envious Managers – a Theoretical Analysis

Crummenerl

Doll

Koziol

2014

Euro Fin Management

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This paper analyses how envy affects the decisions of competing managers and their optimal stock-based compensation from the perspective of shareholder value. We consider a typical framework in which managers can induce effort to reduce production costs and make decisions regarding production volume. At first glance, envy between managers from competing firms appears to be an unfavorable characteristic because it does not align the interests of managers with those of shareholders. However, our model finds that envy is a powerful incentive mechanism. The model yields three key findings: (i) envious managers outperform self-interested managers, (ii) firms optimally hire envious managers, and (iii) shareholders do not grant any stock-based compensation to envious managers.

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Relative Performance or Team Evaluation? Optimal Contracts for Other-Regarding Agents

Cited by 26 publications

References 26 publications

Venture Capital Contracting with Double-Sided Moral Hazard and Fairness Concerns

Venture Capital Contracting with Double-Sided Moral Hazard and Fairness Concerns

Team Incentives and Reference‐Dependent Preferences

How to Pay Envious Managers – a Theoretical Analysis

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