USING COST OBSERVATION TO REGULATE A MANAGER WHO HAS A PREFERENCE FOR EMPIRE-BUILDING

• Type: Article in International Scientific Journal
• Date: 2011

Authors

Ana P. Borges (Author) FEP; João Correia-da-Silva (Author) FEP

Journal

Title: Manchester School

Vol. 79

Pages: 29-44

ISSN: 1463-6786

Publisher: Wiley-Blackwell

Indexing

ISI Web of Knowledge - 2 Citations

ISI Web of Science

Scopus - 3 Citations

Econlit

Scientific classification

FOS: Social sciences > Economics and Business

CORDIS: Social sciences

Other information

Authenticus ID: P-002-XVV

DOI: 10.1111/j.1467-9957.2010.02224.x

Abstract (EN): We study regulation of a manager who has a preference for empire-building (high output), in the presence of moral hazard (unobservable effort) and adverse selection (unobservable productivity). We find that the optimal contract is linear in cost, being composed by a fixed payment plus a partial cost reimbursement. The preference for higher output reduces the manager's tendency to announce that his or her productivity is low, allowing a more powered incentive scheme (a lower fraction of the cost is reimbursed), which alleviates the problem of moral hazard.

Language: English

Type (Professor's evaluation): Scientific

No. of pages: 16