Contract-based motivation for keeping records of a manager’s reporting and budgeting history

Contract-based motivation for keeping records of a manager’s reporting and budgeting history

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Article ID: iaor19942156
Country: United States
Volume: 40
Issue: 4
Start Page Number: 484
End Page Number: 495
Publication Date: Apr 1994
Journal: Management Science
Authors: , ,
Keywords: investment, organization
Abstract:

This paper analyzes the role of the agent’s bankruptcy constraints in multiperiod principal-agent models with asymmetric information. Conditions are provided under which commitment to a long-term contract involving N rounds of investment improves upon repetition of N identical single-period contracts. Further, when the agent’s reservation wage is sufficiently low the optimal contract is always long term. Keeping records of a manager’s history of reporting activity facilitates contracting, since optimal contracts may require a link between past reports and future investments over a duration of two or more periods.

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