Impatience versus Incentives

Opp, Marcus M.; Zhu, John Y.

doi:10.3982/ecta11473

Cited by 22 publications

(6 citation statements)

References 23 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…24 Many studies of risk sharing in labor contracts emphasize the lack of commitment on the firm's side (e.g., Thomas andWorrall (1988), Abreu, Pearce, andStacchetti (1990), Ray (2002), Grochulski andMiao andZhang (2014)). More generally, the relational contract literature (e.g., Atkeson (1991), Levin (2003), and Opp and Zhu (2015)) studies the lack of commitment for both contracting parties. 25 For instance, Berk, Stanton, and Zechnar (2010), Ai and Li (2015), and Bolton, Wang and Yang (2019).…”

Section: Figurementioning

confidence: 99%

Dynamic Compensation Under Uncertainty Shocks and Limited Commitment

Feng

2020

J. Financ. Quant. Anal.

View full text Add to dashboard Cite

This article studies dynamic compensation and risk management under cash-flow volatility shocks. The optimal contract depends critically on firms’ ability to make good on promised future payments to managers. When volatility is low, firms with full commitment ability implement high pay–performance sensitivity to motivate effort from managers, and they impose large penalties on the arrival of volatility shocks to incentivize prudent risk management. In contrast, firms with limited commitment may allow excessive risk taking in exchange for low pay–performance sensitivity. When volatility becomes high, firms with full commitment defer compensation more, whereas firms with limited commitment must expedite payments.

show abstract

Section: Figurementioning

confidence: 99%

Dynamic Compensation Under Uncertainty Shocks and Limited Commitment

Feng

2020

J. Financ. Quant. Anal.

View full text Add to dashboard Cite

show abstract

“…Two previous papers have explored the shape of discounting using lab-experimental preference measures in the monetary domain.Benhabib et al (2008) test between hyperbolic, quasi-hyperbolic, and exponential models, but do not have the power to distinguish between them.Tanaka et al (2010) reject that preferences are purely hyperbolic, quasi-hyperbolic, or exponential.8 Dellavigna and Malmendier (2004) study how the firm's profit-maximizing contract varies with consumer time preferences Opp and Zhu (2015). study the implications of agent impatience for dynamically selfsustaining agreements when agents can renege on agreements, e.g., settings with upfront payment to workers.9 Clark (1994) finds anecdotal evidence that 19th century factory workers often shirked at the beginning of pay cycles, Oyer (1998) finds sales spike among US salespeople near the end of the year when bonuses are paid, andKaur et al (2015) show that piece-rate workers increase output as the weekly pay-day approaches.…”

mentioning

confidence: 99%

Incentivizing Behavioral Change: The Role of Time Preferences

Aggarwal¹,

Dizon‐Ross²,

Zucker³

2020

View full text Add to dashboard Cite

How should the design of incentives vary with the time preferences of agents? We formulate predictions for two incentive contract variations that should increase ecacy for impatient agents relative to patient ones: increasing the frequency of incentive payments, and making the contract "dynamically non-separable" by only rewarding compliance in a given period if the agent complies in a minimum number of other periods. We test the e cacy of these variations, and their interactions with time preferences, using a randomized evaluation of an incentives program for exercise among 3,200 diabetics in India. On average, providing incentives increases daily walking by 1,300 steps or roughly 13 minutes of brisk walking, and decreases the health risk factors for diabetes. Increasing the frequency of payment does not increase e↵ectiveness, suggesting limited impatience over payments. However, making the payment function dynamically non-separable increases cost-e↵ectiveness. Consistent with our theoretical predictions, agent impatience over walking appears to play a role in non-separability's e cacy: both heterogeneity analysis based on measured impatience and a calibrated model suggest that the non-separable contract works better for the impatient.

show abstract

“…Example 2 is a generalization of Hartman-Glaser et al(2012)andMalamud et al (2013) by allowing for arbitrary correlation structures between failure events. Example 3 is a one-time action version of Sannikov (2014).6 See, e.g.,DeMarzo and Duffie (1999),DeMarzo and Sannikov (2006), orOpp and Zhu (2015).…”

mentioning

confidence: 99%

Only Time Will Tell: A Theory of Deferred Compensation

Hoffmann

Inderst

Opp

2020

The Review of Economic Studies

View full text Add to dashboard Cite

This paper characterizes optimal compensation contracts in principal-agent settings where the consequences of the agent’s action are only observed over time. The optimal timing of pay trades-off the costs of deferred compensation arising from the agent’s relative impatience and potential consumption smoothing needs against the benefit of exploiting additional informative signals. By capturing this information benefit of deferral in terms of the likelihood ratio dynamics, our characterization covers general signal processes in a unified setting. With bilateral risk neutrality and agent limited liability, optimal contracts are high-powered and stipulate at most two payout dates. If the agent is additionally risk-averse, payouts are contingent on performance exceeding a hurdle that is increasing over time. We obtain clear-cut predictions on how the duration of optimal compensation depends on the nature of information arrival as well as agent characteristics and derive implications for the maturity structure of securities in financial contracting settings.

show abstract

Impatience versus Incentives

Abstract: This paper studies the dynamics of long-term contracts in repeated principal-agent relationships with an impatient agent. Despite the absence of exogenous uncertainty, Pareto-optimal dynamic contracts generically oscillate between favoring the principal and favoring the agent.

Cited by 22 publications

References 23 publications

Dynamic Compensation Under Uncertainty Shocks and Limited Commitment

Dynamic Compensation Under Uncertainty Shocks and Limited Commitment

Incentivizing Behavioral Change: The Role of Time Preferences

Only Time Will Tell: A Theory of Deferred Compensation

Contact Info

Product

Resources

About