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Title:Incentives, project choice and dynamic multitasking PDF Logo
Authors:Szydlowski, Martin
Issue Date:2011
Series/Report no.:Discussion Paper, Center for Mathematical Studies in Economics and Management Science 1525
Abstract:I study the optimal choice of investment projects in a continuous time moral hazard model with multitasking. While in the first best, projects are invariably chosen by the net present value (NPV) criterion, moral hazard introduces a cutoff for project execution which depends on both a project's NPV as well as it's signal to noise ratio (SN). The cutoff shifts dynamically depending on the past history of shocks, current firm size and the agent's continuation value. When the ratio of continuation value to firm size is large, investment projects are chosen more efficiently, and project choice will depend more on the NPV and less on the signal to noise ratio. The optimal contract can be implemented with an equity stake, bonus payments, as well as a personal account. Interestingly, when the contract features equity only, the project selection rule resembles a hurdle rate criterion.
Subjects:Continuous-time contracting
Project Choice
Multitasking
Bonus Payments
CEO Compensation
JEL:D86
G11
G31
G32
M12
M52
Document Type:Working Paper
Appears in Collections:Discussion Papers, Kellogg School of Management, Northwestern University

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