Incentive Contracts and Downside Risk Sharing

Bernard Sinclair-Desgagné and Sandrine Spaeter ()
Additional contact information
Sandrine Spaeter: BETA - Bureau d'Économie Théorique et Appliquée - INRA - Institut National de la Recherche Agronomique - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique

Post-Print from HAL

Abstract: This paper seeks to characterize incentive compensation in a principal-agent moral hazard setting in which the principal is prudent, or downside risk averse, as many situations (such as that of a patient in hospital or a regulator dealing with food safety) suggest she should be. We show that optimal incentive pay should then be ëapproximately concaveíin performance, the approximation being closer the more downside risk averse the principal is compared to the agent. Limiting the agentís liability would improve the approximation, but taxing the principal would make it coarser. The notion of an approximately concave function we introduce here to describe the pay-performance relationship is relatively recent in mathematics; it is intuitive and translates into concrete empirical implications, notably for the composition of incentive pay. We also clarify which measure of prudence - among the various ones proposed in the literature - is relevant to investigate the tradeo§ between downside risk sharing and incentives.

Keywords: Pay-performance relationship; Executive compensation; Downside risk aversion; Approximate concavity (search for similar items in EconPapers)
Date: 2018-03-01
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Published in Journal of Law, Economics, and Organization, 2018, 34 (1), pp.79-107. ⟨10.1093/jleo/ewx014⟩

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Working Paper: Incentive Contracts and Downside Risk Sharing (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-02292797

DOI: 10.1093/jleo/ewx014

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().