School Attendance, Child Labor and Cash Transfers: An Impact Evaluation of Panes
affiliation not provided to SSRN
Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE); Universidad de la República - Instituto de Economía
Universidad de la Republica (Uruguay) - Instituto de Economia - Facultad de Ciencias Economicas
February 9, 2012
PEP PIERI Working Paper No. 2011-22
We use a comparative approach to study the incentives provided by different types of compensation contracts, and their valuation by risk averse managers, in a fairly general setting. We show that concave contracts tend to provide more incentives to risk averse managers, while convex contracts tend to be more valued by prudent managers. This is because concave contracts concentrate incentives where the marginal utility of risk averse managers is highest, while convex contracts protect against downside risk. Thus, prudence can contribute to explain the prevalence of stock-options in executive compensation. We also present a condition on the utility function which enables to compare the structure of optimal contracts associated with different risk preferences.
JEL Classification: I38, J13, I21, J22working papers series
Date posted: February 10, 2012
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