Relative incentive rate in a multi-period and multi-task agency
by Junwook Yoo
Asian J. of Management Science and Applications (AJMSA), Vol. 3, No. 1, 2017

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.

Online publication date: Sat, 08-Apr-2017

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