Contracting with a Long-Horizon Agent on a Short-Term Project

AAA Management Accounting Section 2006 Meeting Paper

25 Pages Posted: 23 Jan 2006

See all articles by Romana L. Autrey

Romana L. Autrey

Willamette University - Atkinson Graduate School of Management

Shane S. Dikolli

Darden School of Business University of Virginia

Paul Newman

University of Texas at Austin - Department of Accounting

Date Written: July 2005

Abstract

We analyze a setting in which a short-term project is executed by an agent who has a long-term horizon, which is manifested in the form of career concerns. In particular, the agent may have an incentive to take actions that are not completely compatible with the interests of the hiring principal, in order to inform the labor market of the agent's abilities. We find that the relation between the incentive weight on a contractible performance measure and the noise in that measure depends on the strength of the career concerns. We further show that the decision to disclose a performance measure that the labor market uses to update beliefs about the agent's ability depends on both the strength of the career concerns and the compatibility of non-contractible outcomes with the principal's interests. The results have direct implications for the ongoing debate regarding whether firms should make more transparent the basis on which executive compensation is paid.

Keywords: Career Concerns, Agent Horizon, Performance Measures

JEL Classification: J31, M41, M52

Suggested Citation

Autrey, Romana L. and Dikolli, Shane Sami and Newman, Donald Paul, Contracting with a Long-Horizon Agent on a Short-Term Project (July 2005). AAA Management Accounting Section 2006 Meeting Paper. Available at SSRN: https://ssrn.com/abstract=772347 or http://dx.doi.org/10.2139/ssrn.772347

Romana L. Autrey (Contact Author)

Willamette University - Atkinson Graduate School of Management ( email )

900 State Street
Salem, OR 97301
United States

Shane Sami Dikolli

Darden School of Business University of Virginia ( email )

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

Donald Paul Newman

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States

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