Incentives, Project Choice, and Dynamic Multitasking

75 Pages Posted: 21 Apr 2011 Last revised: 22 Feb 2016

See all articles by Martin Szydlowski

Martin Szydlowski

University of Minnesota - Twin Cities - Carlson School of Management

Date Written: May 18, 2015

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.

Keywords: Continuous-time contracting, Project Choice, Multitasking, Bonus Payments, CEO Compensation

JEL Classification: D86, G11, G31, G32, M12, M52

Suggested Citation

Szydlowski, Martin, Incentives, Project Choice, and Dynamic Multitasking (May 18, 2015). Available at SSRN: https://ssrn.com/abstract=1815408 or http://dx.doi.org/10.2139/ssrn.1815408

Martin Szydlowski (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

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