Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/181654 
Year of Publication: 
2018
Series/Report no.: 
SAFE Working Paper No. 218
Publisher: 
Goethe University Frankfurt, SAFE - Sustainable Architecture for Finance in Europe, Frankfurt a. M.
Abstract: 
This paper provides a complete characterization of optimal contracts in principal-agent settings where the agent's action has persistent effects. We model general information environments via the stochastic process of the likelihood-ratio. The martingale property of this performance metric captures the information benefit of deferral. Costs of deferral may result from both the agent's relative impatience as well as her consumption smoothing needs. If the relatively impatient agent is risk neutral, optimal contracts take a simple form in that they only reward maximal performance for at most two payout dates. If the agent is additionally risk-averse, optimal contracts stipulate rewards for a larger selection of dates and performance states: The performance hurdle to obtain the same level of compensation is increasing over time whereas the pay-performance sensitivity is declining.
Subjects: 
compensation design
duration of pay
moral hazard
persistence
principal-agent models
informativeness principle
JEL: 
D86
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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