Does Improved Information Improve Incentives?

74 Pages Posted: 24 May 2013 Last revised: 28 Dec 2022

See all articles by Pierre Chaigneau

Pierre Chaigneau

Queen's University; Queen’s University

Alex Edmans

London Business School - Institute of Finance and Accounting; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Daniel Gottlieb

London School of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: August 1, 2017

Abstract

This paper studies the value of more precise signals on agent performance in an optimal contracting model with endogenous effort. With limited liability, the agent's wage is increasing in output only if output exceeds a threshold, else it is zero regardless of output. If the threshold is sufficiently high, the agent only beats it, and is rewarded for increasing output through greater effort, if there is a high noise realization. Thus, a fall in output volatility reduces effort incentives -- information and effort are substitutes -- offsetting the standard effect that improved information lowers the cost of compensation. We derive conditions relating the incentive effect to the underlying parameters of the agency problem.

Keywords: Executive compensation, limited liability, options, risk management, relative performance evaluation.

JEL Classification: D86, G32, G34, J33

Suggested Citation

Chaigneau, Pierre and Edmans, Alex and Gottlieb, Daniel, Does Improved Information Improve Incentives? (August 1, 2017). Journal of Financial Economics (JFE), Forthcoming, European Corporate Governance Institute (ECGI) - Finance Working Paper No. 442/2014, Available at SSRN: https://ssrn.com/abstract=2269380 or http://dx.doi.org/10.2139/ssrn.2269380

Pierre Chaigneau

Queen's University ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Queen’s University ( email )

Alex Edmans (Contact Author)

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Daniel Gottlieb

London School of Economics ( email )

New Academic Building 5.30
Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://https://personal.lse.ac.uk/gottlied/

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