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Optimal incentives for managerial innovation

Author

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  • Loyola, Gino
  • Portilla, Yolanda

Abstract

An agency model is proposed that identifies the optimal executive compensation scheme for a business where the owner’s delegation of investment decision-making to the manager gives rise to a two-dimensional moral hazard problem relating to the levels of managerial effort and innovation, respectively. The optimal executive compensation structure is shown to depend on which of the two moral hazard dimensions predominates, thus accounting for the coexistence in the real-world of bonus-like plans with different convexity degrees and risk-reward schemes. The model also identifies the conditions under which the efficient investment policy involves high innovation, highlighting the role played by the delegation of investment decisions in the coexistence of high-tech and more traditional industries.

Suggested Citation

  • Loyola, Gino & Portilla, Yolanda, 2023. "Optimal incentives for managerial innovation," The North American Journal of Economics and Finance, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:ecofin:v:68:y:2023:i:c:s1062940823001055
    DOI: 10.1016/j.najef.2023.101982
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    References listed on IDEAS

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    1. repec:oup:rfinst:v:21:y:2017:i:5:p:1805-1846. is not listed on IDEAS
    2. Alex Edmans & Vivian W. Fang & Katharina A. Lewellen, 2017. "Equity Vesting and Investment," The Review of Financial Studies, Society for Financial Studies, vol. 30(7), pages 2229-2271.
    3. Arthur Korteweg & Morten Sorensen, 2010. "Risk and Return Characteristics of Venture Capital-Backed Entrepreneurial Companies," The Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3738-3772, October.
    4. Alex Edmans & Xavier Gabaix, 2011. "The Effect of Risk on the CEO Market," The Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2822-2863.
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    Cited by:

    1. Alberto Razul & Orlando Gomes & Mohamed Azzim Gulamhussen, 2024. "Bonuses, options, and bank strategies," SN Business & Economics, Springer, vol. 4(1), pages 1-28, January.

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    More about this item

    Keywords

    Corporate governance; Agency problem; Innovation; Executive compensation; Investment policy;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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