Managerial Incentives, Investment and Aggregate Implications: Scale Effects

Bengt R. Holmstrom · Laurence Weiss

63 citations0/0 files storedThe Review of Economic Studies

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Capital Investment and Risk Analysis Economic Growth and Productivity Economic theories and models

Abstract

We explore a managerial model of investment behaviour in which an incentive problem arises because one input factor (managerial effort) is not publicly observed. We show that an optimal incentive contract leads to investment levels which are below first-best in low states and that this phenomenon can account for greater cyclical variability in aggregate production and investment. From the perspective of incentive scheme design, a special feature of the model is that screening takes place over two variables (investment and output) rather than one as is customary.

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1979Moral Hazard and Observability 1972Expectations and the neutrality of money 1971An Exploration in the Theory of Optimum Income Taxation 1973The Economic Theory of Agency: The Principal's Problem.1976The design of tax structure: Direct versus indirect taxation 1979Risk Sharing and Incentives in the Principal and Agent Relationship 1986Managerial Incentives and Capital Management 1976Optimal tax theory

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