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Costs And Benefits From Repricing Employee

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  • Barbara Pirchegger

Abstract

A principal-agent model is used to analyze whether repricing stock option contracts can be beneficial for the contracting parties. A principal employs an agent and offers him an exogenously given contract that includes a fixed compensation payment as well as stock options. After the contract is signed, the agent performs two efforts that the principal cannot observe. As soon as the first effort is completed, both parties observe a signal that contains information about the final share price. At the end of the period the agent is paid according to his contract. The signal is assumed to reveal information about either an unobservable state of nature or the agent‘s first effort. For both settings a commitment scenario and a renegotiation scenario are compared. The paper shows that if the signal contains information about the state of nature to occur the renegotiation setting might weakly dominate the commitment setting. However, if the signal is informative about the agent‘s first effort, the renegotiation setting turns out to be weakly dominated by the commitment setting.

Suggested Citation

  • Barbara Pirchegger, 2002. "Costs And Benefits From Repricing Employee," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 54(1), pages 80-111, January.
    • Handle: RePEc:sbr:abstra:v:54:y:2002:i:1:p:80-111
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    More about this item

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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