Limited liability contracts between principal and agent

Sappington, David E. M.

doi:10.1016/0022-0531(83)90120-5

Cited by 445 publications

(200 citation statements)

References 14 publications

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“…The high bonus b H will be paid to an employee if realized output exceeds a certain standard y (i.e., y t > y), whereas the low bonus b L (< b H ) is given to the employee otherwise (i.e., y t < y). Suppose that employees are protected by limited liability (see, e.g., Sappington 1983;Innes 1990;Kim 1997) in the sense that bonuses are not allowed to be negative. Moreover, let the employees be risk neutral and be characterized by a convex disutility-of-effort function (in monetary terms) c(e t ) with c(0) = c´(0) = 0.…”

Section: Bonuses As Complements To Internal Careersmentioning

confidence: 99%

Bonus Payments, Hierarchy Levels, and Tenure: Theoretical Considerations and Empirical Evidence

Grund

Kräkel

2012

Schmalenbach Bus Rev

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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. Using data on executive compensation for the German chemical industry, we investigate the relevance of two theoretical approaches that focus on bonuses as part of a long term wage policy of a firm. The first approach argues that explicit bonuses serve as substitutes for implicit career concerns. The second approach claims that bonuses are used as complements to an executive's internal career. Our data show that bonus payments are mostly prevalent among senior executives at higher hierarchy levels and rather for management jobs than for jobs in research and development. This is true for the whole chemical sector as well as for single large corporations. The findings indicate that the two theoretical views are not mutually exclusive, but are both relevant in practice. JEL Classification:M52, J33

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Section: Bonuses As Complements To Internal Careersmentioning

confidence: 99%

Bonus Payments, Hierarchy Levels, and Tenure: Theoretical Considerations and Empirical Evidence

Grund

Kräkel

2012

Schmalenbach Bus Rev

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“…Until recently, the insurance literature has neglected the e ect of agents' limited liability constraints on the demand for insurance; Landsberger and Meilijson 1993 is a rare exception. Limited liability constraints have been considered in the principal-agent literature see Sappington 1983 , andDemski, Sappington andSpiller 1988 and in industrial organization see Brander and Lewis 1989 but these constraints are exogenous and ignore the role of banks in their determination. We h a v e also witnessed recently the development of the theory of optimal nancial contracts based on informational asymmetries see Townsend 1979, Gale and Hellwig 1985and Bolton and Scharfstein 1990 .…”

Section: Introductionmentioning

confidence: 99%

Environmental risks and bank liability

Boyer

Laffont

1997

European Economic Review

143

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Décembre 1994Ce document est publié dans l'intention de rendre accessible les résultats préliminaires de la recherche effectuée au CIRANO, afin de susciter des échanges et des suggestions.Les idées et les opinions émises sont sous l'unique responsabilité des auteurs, et ne représentent pas nécessairement les positions du CIRANO ou de ses partenaires.This paper presents preliminary research carried out at CIRANO and aims to encourage discussion and comment. The observations and viewpoints expressed are the sole responsibility of the authors. ABSTRACTMany g o v ernments have i n troduced or are considering introducing laws to recover from the liable parties the cleanup costs caused by pollution damages. In particular, the banks who nance the rms causing environmental damages may be considered liable.In various court cases in the US and elsewhere, banks have been found liable, while they have been exempted in others. We develop a multiprincipal-agent model in which the insurance sector may insure the rm for the pollution risk and the bank may lend money for investment. Under complete information of the bank about the rm's activities, the limited liability of the rm induces excessive i n v estment and insu cient care but full liability of the bank creates the appropriate internalization of the environmental risk. This rationalization of the laws on lender liability m ust be quali ed because in general the banks su er from agency problems adverse selection and moral hazard in their relationships with rms. In the adverse selection case, full liability of the bank leads to underinvestment. Partial liability is better but may fail to implement the optimal second best allocation. In the case of moral hazard, full responsibility is killing the project too often while still leading to low care too often. Partial responsibility m a y a c hieve the second best optimal allocation but in some cases the level of responsibility necessary to induce the proper level of care is too high for the project to be nanced by the bank. We conclude with a discussion of the implications of our results with regards to liability laws for environmental damages.Keywords: Environmental Risk, Pollution, Lender Liability, Banking, CERCLA. JEL R ESUM EPlusieurs gouvernements ont i n troduit ou pensent i n troduire des lois leur permettant d e recouvrer les coûts de decontamination aupres des parties responsables de la pollution. Les banques des entreprises concernees peuvent, en particulier,être tenues responsables des dommages et elles l'ont e ectivement ete dans certains cas. Nous proposons ici un modele principal-agent a v ec un secteur assurance et un secteur bancaire. Dans le cas ou l a banque possede une information complete des activites de l'entreprise, nous montrons que les regles de responsabilite limitee menent a des niveaux d'investissement e t d e n egligence trop eleves que peut par ailleurs corriger adequatement la pleine responsabilisation de la banque. Cette rationalisation des lois sur la responsabilite des prêteurs doitêtre reexa...

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“…Well-known agency problems (for instance, Holmstrom, 1979;Sappington, 1983) have been studied in bilateral, partial equilibrium settings as opposed to an equilibrium setting such as ours. Monitoring and its associated free-riding have been studied in professional partnerships (Miller, 1997;Liang, 2003, 2005), where monitoring is performed by the very partners whose productive effort is subject to moral hazard.…”

Section: Introductionmentioning

confidence: 99%

Information asymmetry and equilibrium monitoring in education

Ferreyra

Liang

2012

Journal of Public Economics

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We develop a theoretical and computational model of school choice and achievement that embeds information asymmetries in the provision of education. Because school effort is unobservable to households and policymakers, schools have an incentive to under provide effort. This moral hazard affects both public and private schools, although public schools are subject to an additional distortion because of limited competition and fixed funding. Household monitoring of schools can mitigate moral hazard, but some households may free-ride on the monitoring of others. Using our calibrated model we simulate two policies aimed at raising achievement: public monitoring of public schools and private school vouchers. Our results indicate that in large scale settings no single tool may suffice. The reason is twofold: a) no tool raises achievement or welfare for all households; and b) since the extent of moral hazard is endogenous, the application of each tool has unintended consequences that limit its own effectiveness. Results also indicate that setting the policy parameters for public schools at the levels preferred by the majority of households may mitigate the distortions. Nonetheless, the current actual values of these parameters seem to match more closely the preferences of public schools than the preferences of parents.

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Limited liability contracts between principal and agent

Cited by 445 publications

References 14 publications

Bonus Payments, Hierarchy Levels, and Tenure: Theoretical Considerations and Empirical Evidence

Bonus Payments, Hierarchy Levels, and Tenure: Theoretical Considerations and Empirical Evidence

Environmental risks and bank liability

Information asymmetry and equilibrium monitoring in education

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