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.
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 *