IDEAS home Printed from https://ideas.repec.org/a/aea/aejmic/v11y2019i4p111-50.html
   My bibliography  Save this article

Dynamic Non-monetary Incentives

Author

Listed:
  • Daniel Bird
  • Alexander Frug

Abstract

We study a principal-agent interaction where investments and rewards arrive stochastically over time and are privately observed by the agent. Investments (costly for the agent, beneficial for the principal) can be concealed by the agent. Rewards (beneficial for the agent, costly for the principal) can be forbidden by the principal. We ask how rewards should be used and which investments incentivized. We identify the unique optimal mechanism and analyze the dynamic investment and compensation policies. When all rewards are identical, the unique optimal way to provide incentives is by a "carte blanche" to pursue all rewards arriving in a predetermined time frame.

Suggested Citation

  • Daniel Bird & Alexander Frug, 2019. "Dynamic Non-monetary Incentives," American Economic Journal: Microeconomics, American Economic Association, vol. 11(4), pages 111-150, November.
    • Handle: RePEc:aea:aejmic:v:11:y:2019:i:4:p:111-50
    Note: DOI: 10.1257/mic.20170025
    as

    Download full text from publisher

    File URL: https://www.aeaweb.org/doi/10.1257/mic.20170025
    Download Restriction: no
    File URL: https://www.aeaweb.org/doi/10.1257/mic.20170025.ds
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Mark Armstrong & John Vickers, 2010. "A Model of Delegated Project Choice," Econometrica, Econometric Society, vol. 78(1), pages 213-244, January.
    2. Lazear, Edward P, 1981. "Agency, Earnings Profiles, Productivity, and Hours Restrictions," American Economic Review, American Economic Association, vol. 71(4), pages 606-620, September.
    3. Spear, Stephen E. & Wang, Cheng, 2005. "When to fire a CEO: optimal termination in dynamic contracts," Journal of Economic Theory, Elsevier, vol. 120(2), pages 239-256, February.
    4. Lipnowski, Elliot & Ramos, João, 2020. "Repeated delegation," Journal of Economic Theory, Elsevier, vol. 188(C).
    5. Alexander Frankel, 2014. "Aligned Delegation," American Economic Review, American Economic Association, vol. 104(1), pages 66-83, January.
    6. Milton Harris & Bengt Holmstrom, 1982. "A Theory of Wage Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(3), pages 315-333.
    7. Jin Li & Niko Matouschek & Michael Powell, 2017. "Power Dynamics in Organizations," American Economic Journal: Microeconomics, American Economic Association, vol. 9(1), pages 217-241, February.
    8. Yuliy Sannikov, 2008. "A Continuous-Time Version of the Principal-Agent Problem," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(3), pages 957-984.
    9. Yingni Guo, 2016. "Dynamic Delegation of Experimentation," American Economic Review, American Economic Association, vol. 106(8), pages 1969-2008, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Daniel Bird & Alexander Frug, 2019. "Monotone contracts," Economics Working Papers 1647, Department of Economics and Business, Universitat Pompeu Fabra.
    2. Spear, Stephen E. & Wang, Cheng, 2005. "When to fire a CEO: optimal termination in dynamic contracts," Journal of Economic Theory, Elsevier, vol. 120(2), pages 239-256, February.
    3. Daniel Bird & Alexander Frug, 2021. "Optimal Contracts with Randomly Arriving Tasks," The Economic Journal, Royal Economic Society, vol. 131(637), pages 1905-1918.
    4. Lipnowski, Elliot & Ramos, João, 2020. "Repeated delegation," Journal of Economic Theory, Elsevier, vol. 188(C).
    5. Christoph Siemroth, 2024. "Ending Wasteful Year‐End Spending: On Optimal Budget Rules In Organizations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(3), pages 1163-1188, August.
    6. Matthew Mitchell, 2018. "Free (Ad)vice," 2018 Meeting Papers 1194, Society for Economic Dynamics.
    7. Forand, Jean Guillaume & Zapal, Jan, 2020. "Production priorities in dynamic relationships," Theoretical Economics, Econometric Society, vol. 15(3), July.
    8. Chen, Yi, 2022. "Dynamic delegation with a persistent state," Theoretical Economics, Econometric Society, vol. 17(4), November.
    9. Rantakari, Heikki, 2023. "How to reward honesty?," Journal of Economic Behavior & Organization, Elsevier, vol. 207(C), pages 129-145.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lipnowski, Elliot & Ramos, João, 2020. "Repeated delegation," Journal of Economic Theory, Elsevier, vol. 188(C).
    2. Daniel Bird & Alexander Frug, 2021. "Optimal Contracts with Randomly Arriving Tasks," The Economic Journal, Royal Economic Society, vol. 131(637), pages 1905-1918.
    3. Chen, Ying & Eraslan, Hulya, 2018. "Learning While Setting Precedents," Working Papers 18-001, Rice University, Department of Economics.
    4. Ronald Anderson & Cecilia Bustamante & Stéphane Guibaud & Mihail Zervos, 2018. "Agency, Firm Growth, and Managerial Turnover," Post-Print hal-03391936, HAL.
    5. Guo, Yingni & Hörner, Johannes, 2020. "Dynamic Allocation without Money," TSE Working Papers 20-1133, Toulouse School of Economics (TSE).
    6. Barbos, Andrei, 2019. "Dynamic contracts with random monitoring," Journal of Mathematical Economics, Elsevier, vol. 85(C), pages 1-16.
    7. repec:spo:wpmain:info:hdl:2441/2iclr3ojhv9ko9ord4mpg9odaj is not listed on IDEAS
    8. Kishishita, Daiki, 2020. "(Not) delegating decisions to experts: The effect of uncertainty," Journal of Economic Theory, Elsevier, vol. 190(C).
    9. Amador, Manuel & Bagwell, Kyle, 2020. "Money burning in the theory of delegation," Games and Economic Behavior, Elsevier, vol. 121(C), pages 382-412.
    10. Ronald Anderson & Cecilia Bustamante & Stéphane Guibaud & Mihail Zervos, 2018. "Agency, Firm Growth, and Managerial Turnover," SciencePo Working papers Main hal-03391936, HAL.
    11. repec:hal:spmain:info:hdl:2441/2iclr3ojhv9ko9ord4mpg9odaj is not listed on IDEAS
    12. Borys Grochulski & Yuzhe Zhang, 2017. "Market‐Based Incentives," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58(2), pages 331-382, May.
    13. Wang, Cheng & Yang, Youzhi, 2022. "Optimal CEO turnover," Journal of Economic Theory, Elsevier, vol. 203(C).
    14. Daniel Bird & Alexander Frug, 2019. "Monotone Contracts," Working Papers 1085, Barcelona School of Economics.
    15. Forand, Jean Guillaume & Zapal, Jan, 2020. "Production priorities in dynamic relationships," Theoretical Economics, Econometric Society, vol. 15(3), July.
    16. Gregorio Curello & Ludvig Sinander, 2020. "Screening for breakthroughs," Papers 2011.10090, arXiv.org, revised Feb 2024.
    17. Eduardo Engel & Ronald Fischer & Alexander Galetovic & Jennifer Soto, 2019. "Financing PPP Projects with PVR Contracts: Theory and Evidence from the UK and Chile," Documentos de Trabajo 347, Centro de Economía Aplicada, Universidad de Chile.
    18. Ronald Anderson & Cecilia Bustamante & Stéphane Guibaud & Mihail Zervos, 2018. "Agency, Firm Growth, and Managerial Turnover," SciencePo Working papers hal-03391936, HAL.
    19. Yingni Guo & Johannes Hörner, 2021. "Dynamic Allocation without Money," Working Papers hal-03187506, HAL.
    20. Wang, Cheng & Yang, Youzhi, 2019. "Optimal self-enforcement and termination," Journal of Economic Dynamics and Control, Elsevier, vol. 101(C), pages 161-186.
    21. Wang, Cheng & Yang, Youzhi, 2015. "Outside opportunities and termination," Games and Economic Behavior, Elsevier, vol. 91(C), pages 207-228.
    22. Juan Escobar & Qiaoxi Zhang, 2019. "Delegating Learning," Documentos de Trabajo 348, Centro de Economía Aplicada, Universidad de Chile.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aejmic:v:11:y:2019:i:4:p:111-50. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.