Title: Relative incentive rate in a multi-period and multi-task agency

Authors: Junwook Yoo

Addresses: College of Business, Marshall University, One John Marshall Drive, Huntington, WV 25755, USA

Abstract: This study explicitly calculates the relative incentive rate in an N-period contract with multiple tasks. The inter-temporal covariance risk, as well as the within-period risk premium, prevents the first best allocation of effort from being endogenously achieved even if the first best allocation is feasible. The inter-temporal covariance risk reduces the effective sensitivity of a performance measure, and thus the performance measure with a bigger inter-temporal covariance risk is assigned a weaker relative incentive rate. From these results, an empirical prediction is derived that a performance measure with larger positive (negative) inter-temporal covariances is assigned a weaker (stronger) relative incentive rate in multi-period contracts.

Keywords: relative incentive rate; performance measures; multi-period; multi-task; inter-temporal covariance.

DOI: 10.1504/AJMSA.2017.083496

Asian Journal of Management Science and Applications, 2017 Vol.3 No.1, pp.1 - 23

Received: 15 Feb 2016
Accepted: 27 Jun 2016

Published online: 08 Apr 2017 *

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