Investment Under Uncertainty, Heterogeneous Beliefs and Agency Conflicts

Giat, Yahel; Hackman, Steve; Subramanian, Ajay

doi:10.2139/ssrn.1105404

Cited by 8 publications

(11 citation statements)

References 28 publications

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“…3 Part of this literature has analyzed the characteristics of the optimal contract when the manager and the shareholder hold di¤erent beliefs (see e.g. Adrian and Wester…eld (2008); Giat, Hackman and Subramanian (2010); Jung and Subramanian (2014)). Our approach is di¤erent as we consider a setting with several heterogenous shareholders and, importantly, we introduce the possibility to trade in an asset market.…”

Section: Related Literaturementioning

confidence: 99%

Equilibrium CEO Contract with Belief Heterogeneity

2020

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Consider a …rm owned by shareholders with heterogeneous beliefs and run by a manager who chooses random production plans. Shareholders do not observe the chosen plan but only its realization. The …nancial market consists of assets contingent on production realizations. A contract for the manager speci…es her compensation as a function of the …rm's production and possibly some restrictions to trade in the …nancial market. Shareholders are unrestricted. We de…ne a concept of equilibrium between the manager and shareholders such that the equilibrium production plan is unanimously preferred by the manager and the shareholders, markets clear and the manager has no incentive to cheat. We …rst analyze the properties of such equilibria and in particular show that the contract should restrict the manager from trading. We next provide a framework where such equilibria exist. We lastly study the properties of equilibrium compensations when shareholders have beliefs that can be ranked in terms of optimism towards the equilibrium plan. Speci…c attention is given to their departure from linear compensations.

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Section: Related Literaturementioning

confidence: 99%

Equilibrium CEO Contract with Belief Heterogeneity

2020

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“…Frameworks by [45] and [11] also formalize asset trading with divergent prior opinions. Learning among agents can occurs over time, as agents observe a sequence of dividends and prices converge to the fundamentals over long term, [1], [19], [45]. At the same time, agents can update separately their price expectations and dividend expectations, based on the observed market outcomes, [1].…”

Section: Related Literaturementioning

confidence: 99%

“…At the same time, agents can update separately their price expectations and dividend expectations, based on the observed market outcomes, [1]. Finally, managerial decision making under different opinions is exlpored in [19]. In their work the role of asymmetric information and optimism, characterising the divergence of beliefs in principal-agent relationships can create under-investment.…”

Section: Related Literaturementioning

confidence: 99%

Asset trading under non-classical ambiguity and heterogeneous beliefs

Khrennikova

Patra

2019

Physica A: Statistical Mechanics and its Applications

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We propose discrete time asset trading framework based on quantum probability formalism that represents well the ambiguity of agents in respect to the fundamental values and price states of the traded assets. Divergence of beliefs alike classical finance frameworks (e.g. works by Harrison and Kreps, 1978 [24]; Scheinkman and Xiong, 2003 [50]) produces different expectations of agents about the future price distribution of the traded risky asset. The model accounts for the

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“…Then, as long as standard transversality conditions hold, the speci…cation of the terminal utility is immaterial to the analysis. 8 A more concise way to formulate the advantages of the martingale approach is to observe that the control is not anymore closed loop but instead open loop with respect to the output process. 9 The necessary condition can also be derived using Williams'(2008Williams'( , 2009) method based on the Proposition 1 There exists a unique decomposition for the agent's continuation value…”

Section: Necessary Conditions For the Agent' S Problemmentioning

confidence: 99%

“…When U (a; w) is given by (20), the problem greatly simpli…es because U a (w; a) = U (w; a). Then (8) and (15) imply that…”

Section: Optimal Contract Under Exponential Utilitymentioning

confidence: 99%

Dynamic Incentive Contracts Under Parameter Uncertainty

Prat

Jovanovic

2010

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. www.econstor.eu The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit organization supported by Deutsche Post Foundation. The center is associated with the University of Bonn and offers a stimulating research environment through its international network, workshops and conferences, data service, project support, research visits and doctoral program. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. Terms of use: Documents in D I S C U S S I O N P A P E R S E R I E SIZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. We analyze a long-term contracting problem involving common uncertainty about a parameter capturing the productivity of the relationship, and featuring a hidden action for the agent. We develop an approach that works for any utility function when the parameter and noise are normally distributed and when the effort and noise affect output additively. We then analytically solve for the optimal contract when the agent has exponential utility. We find that the Pareto frontier shifts out as information about the agent's quality improves. In the standard spot-market setup, by contrast, when the parameter measures the agent's "quality", the Pareto frontier shifts inwards with better information. Commitment is therefore more valuable when quality is known more precisely. Incentives then are easier to provide because the agent has less room to manipulate the beliefs of the principal. Moreover, in contrast to results under one-period commitment, wage volatility declines as experience accumulates.JEL Classification: D82, D83, E24, J41

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Investment Under Uncertainty, Heterogeneous Beliefs and Agency Conflicts

Cited by 8 publications

References 28 publications

Equilibrium CEO Contract with Belief Heterogeneity

Equilibrium CEO Contract with Belief Heterogeneity

Asset trading under non-classical ambiguity and heterogeneous beliefs

Dynamic Incentive Contracts Under Parameter Uncertainty

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