Optimal Information Design and Incentive Contracts with Performance Measure Manipulation

49 Pages Posted: 4 Dec 2019

See all articles by Robert F. Göx

Robert F. Göx

University of Zurich - Department of Business Administration (IBW); University of Zurich - Managerial Accounting; University of Zurich - Faculty of Economics, Business Administration and Information Technology

Beatrice Michaeli

University of California, Los Angeles (UCLA)

Date Written: November 18, 2019

Abstract

We study how a firm owner motivates a manager to create value by optimally designing an information system and a compensation contract based on a manipulable performance measure. In equilibrium, the firm either implements a perfect or an uninformative system. The information system and the pay-performance sensitivity (PPS) of the compensation contract can be substitutes in a sense that the firm optimally combines a perfect information system with a low PPS or an uninformative system with a high PPS. Because the information design is endogenous, firms facing relatively high manipulation threat may offer financial incentives that are higher-powered than the ones offered by their peers facing lower manipulation threat. If the manager is in charge of implementing the information system, he chooses a perfect one unless the firm uses the information for internal control. The firm may prefer to commit to an internal control level before observing any information.

Keywords: Bayesian persuasion, ex ante information design, performance manipulation, earnings management, incentive contracting, multi-task problem

Suggested Citation

Goex, Robert F. and Michaeli, Beatrice, Optimal Information Design and Incentive Contracts with Performance Measure Manipulation (November 18, 2019). Available at SSRN: https://ssrn.com/abstract=3484199 or http://dx.doi.org/10.2139/ssrn.3484199

Robert F. Goex

University of Zurich - Department of Business Administration (IBW) ( email )

Plattenstrasse 14
Zurich, 8032
Switzerland

University of Zurich - Managerial Accounting ( email )

Plattenstrasse 14
Zurich, CH-8032
Switzerland

University of Zurich - Faculty of Economics, Business Administration and Information Technology ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

Beatrice Michaeli (Contact Author)

University of California, Los Angeles (UCLA) ( email )

D415 Anderson Complex
Los Angeles, CA 90095
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
22
Abstract Views
143
PlumX Metrics