Motivating Entrepreneurial Activity in a Firm

34 Pages Posted: 15 Jun 2006

See all articles by Antonio E. Bernardo

Antonio E. Bernardo

University of California, Los Angeles (UCLA) - Finance Area

Hongbin Cai

Peking University - Guanghua School of Management

Jiang Luo

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: July 2005

Abstract

We consider the problem of motivating privately informed managers to engage in entrepreneurial activity to improve the quality of the firm's investment opportunities. The firm's investment and compensation policy must balance the manager's incentives to provide entrepreneurial effort and to report her private information truthfully. The optimal policy is to underinvest (compared to first-best) and provide weak incentive pay in low-quality projects and overinvest (compared to first-best) and provide strong incentive pay in high-quality projects. We also show that, unlike the standard agency model, uncertainty and incentives can be positively related.

JEL Classification: D82, G31

Suggested Citation

Bernardo, Antonio E. and Cai, Hongbin and Luo, Jiang, Motivating Entrepreneurial Activity in a Firm (July 2005). EFA 2006 Zurich Meetings. Available at SSRN: https://ssrn.com/abstract=909120 or http://dx.doi.org/10.2139/ssrn.909120

Antonio E. Bernardo

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-2198 (Phone)
310-206-5455 (Fax)

Hongbin Cai

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Jiang Luo (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong

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