Agent Employment Horizons and Contracting Demand for Forward-Looking Performance Measures

Posted: 26 Jan 2002

See all articles by Shane S. Dikolli

Shane S. Dikolli

Darden School of Business University of Virginia

Abstract

In this paper, the principal rewards an agent's farsighted effort both in the short- and long-term, with the short-term reward based on a noisy, forward-looking performance measure and the long-term reward based on a potentially less noisy, trailing performance measure. The main result is that optimal contracting weights depend on the agent's employment time horizon: the shorter the agent's employment horizon the greater the emphasis on the forward-looking performance measure and vice versa. This implies that contracting on forward-looking performance measures can be valuable in mitigating any adverse long-term effects of employees myopically focusing on short-term trailing performance measures.

Keywords: Performance measures; Incentive contracts; Agency theory; Time horizons

JEL Classification: J33, J41, M41, M46

Suggested Citation

Dikolli, Shane Sami, Agent Employment Horizons and Contracting Demand for Forward-Looking Performance Measures. Journal of Accounting Research, Vol. 39, No. 3, December 2001. Available at SSRN: https://ssrn.com/abstract=293699

Shane Sami Dikolli (Contact Author)

Darden School of Business University of Virginia ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
4342431018 (Phone)

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