School Attendance, Child Labor and Cash Transfers: An Impact Evaluation of Panes
PEP Working Paper No. 2011-22
Posted: 10 Feb 2012 Last revised: 11 Jul 2018
Date Written: February 9, 2012
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, J22
Suggested Citation: Suggested Citation