Optimal Executive Compensation: Some Equivalence Results

This paper studies optimal managerial contracts in two contracting environments. When contracts can be based on earnings, an optimal contract is interpreted as a combination of base salary, golden parachute and bonus. When earnings are not verifiable, two types of optimal contracts are derived: a contract with restricted stock ownership, and a contract with stock options. These three types of optimal contracts are payoff-equivalent in a strong sense: agents' ex ante and ex post payoffs are the same under all three contracts, implying that the choice of contractual form is irrelevant in the environment studied in this paper. This paper thus suggests directions of research for the relevance of different contractual forms.Optimal contract, executive compensation, bonus, golden parachutes, stock ownership, stock options

Leverage, Volatility and Executive Stock Options

Leverage, Volatility and Executive Stock Options Abstract This paper studies how an optimal wage contract can be implemented using stock options, and derives the properties of the optimal contract with stock options. Specifically, we show how the exercise price and the size of the option grant should change in respose to changes in exogenous parameter. First, for a fixed exercise price of executive stock options, the size of the option grant decreases in the riskiness of a desired investment policy, decreases in the volatility of return from the risky project, and increases in leverage. Second, for a fixed size of the option grant, the optimal exercise price of managerial stock options increases in the riskiness of a desired investment policy, increases in the volatility of return from the risky project, and decreases in leverage. Several empirical predictions are drawn from these conclusions regarding the pay-performance sensitivity of management compensation.Leverage, volatility, executive stock options, optimal contract

On the (Sub)optimality of Multi-tier Hierarchies: Coordination versus Motivation

This paper studies internal organization of a firm using an incomplete contracting approach a la Grossman-Hart-Moore and Aghion-Tirole. The two key ingredients of our model are externalities among tasks that require coordination, and investment in task-specific human capital. We compare three types of organizational structures: centralization where the decision authority for all tasks is given to the party without task-specific human capital, decentralization where the decision authority for each task is given to the party with necessary human capital, and hierarchical delegation where the decision authority is allocated in a hierarchical fashion. Centralization is optimal when externalities and the requisite coordination are the main issue in organization design. Decentralization is optimal if the investment in human capital is more important. Hierarchical delegation is optimal in the intermediate case. We also discuss the optimal pattern of hierarchical delegation as well as several directions extending the basic model.Delegation; Incomplete Contracts; Hierarchy

ON THE (SUB) OPTIMALITY OF MULTI-TIER HIERARCHIES: COORDINATION VERSUS MOTIVATION

This paper studies internal organization of a firm using an incomplete contracting approach `a la Grossman-Hart-Moore and Aghion-Tirole. The two key ingredients of our model are externalities among tasks that require coordination, and investment in task-specific human capital. We compare three types of organizational structures: centralization where the decision authority for all tasks is given to the party without task-specific human capital, decentralization where the decision authority for each task is given to the party with necessary human capital, and hierarchical delegation where the decision authority is allocated in a hierarchical fashion. Centralization is optimal when externalities and the requisite coordination are the main issue in organization design. Decentralization is optimal if the investment in human capital is more important. Hierarchical delegation is optimal in the intermediate case. We also discuss the optimal pattern of hierarchical delegation as well as several directions extending the basic model.Delegation, Incomplete Contracts, Hierarchy

Child Labour and Schooling Responses to Access to Microcredit in Rural Bangladesh

Microcredit has been shown to be effective in reducing poverty in many developing countries. However, less is known about its effect on human capital formation. In this paper, we develop a model examining the relation between microcredit and child labour. We then empirically examine the impact of access to microcredit on children’s education and child labour using a new and large data set from rural Bangladesh. We address the selection bias using the instrumental variable method where the instrument relies on an exogenous variation in treatment intensity among households in different villages. The results show that household participation in a microcredit program may increase child labour and reduce school enrolment. The adverse effects are more pronounced for girls than boys. Younger children are more adversely affected than their older siblings and the children of poorer and less educated households are affected most adversely. Our findings remain robust to different specifications and methods, and when corrected for various sources of selection bias.Microcredit, child labour, school enrolment, instrumental variable, treatment effect

The economics of household waste management: a review

In recent years reducing the amount of waste generated by households has become an important policy issue in industrialised economies. It is no longer acceptable to discard waste without concern for environmental and natural resource issues. In an effort to reduce household waste various policy instruments such as kerbside charges, deposit‐refund schemes, integrated sales tax exemptions and virgin material taxes, have been proposed and/or implemented. This article reviews the economics literature that has addressed household waste management. It is argued that a comprehensive modelling framework is necessary if the complex policy environment is to be accurately described.Consumer/Household Economics,

Media, Democracy, and Government Action: Prevention vs. Palliation in the Time of Cholera

This paper studies how media and democracy influence government action taken before and after a natural disaster. The key elements in this relationship are the media's role as the provider of information to voters about government actions and the quality of democracy that pertains to how relevant election results are. We show that more media activity and more democratic institutions both contribute positively to the government's palliative effort after the disaster. However, the effects of media and democracy on the government's preventive effort before the disaster are negative. We provide empirical evidence based on major cholera epidemics around the world, which lends some support to these hypotheses.

Information, Authority, and Corporate Hierarchies

In a typical corporate hierarchy, the manager is delegated the authority to make strategic decisions, and to contract with other employees. By studying a model with one principal and two agents where one agent can gather information that is valuable for the principal's project choice and the other agent provides effort to the chosen project, we study when the principal can benefit from such delegation relative to centralization. We show that beneficial delegation is possible when complete contracts cannot be written, and delegation of authority should necessarily be to the information gatherer. The benets of delegation stem from either efficiency gains or reduction in rent to the information gatherer.Corporate hierarchies; information gathering; delegation; centralization.

Delegated Contracting and Corporate Hierarchies

In a typical corporate hierarchy, the manager is delegated the authority to make decisions that set directions for the organization, employ subordinates and contract with external suppliers. This paper explains when such delegation of authority can be optimal, using a model of a firm with three parties: the principal, the manager and the worker. In centralization with two two-tier hierarchies, the principal designs contracts for both agents. In delegation with a three-tier hierarchy, the principal directly contracts with a delegated agent who, in turn, contracts with the other agent. We identify an environment where the principal can benefit from delegating authority to the manager, but not to the worker. Beneficial delegation arises endogenously when delegation motivates the manager to acquire valuable information, which is used for better decision-making and more effcient incentive provision to the worker. We also show how total surplus is distributed in delegation vis-a-vis centralization, document comparative statics results regarding the benefits of delegation and the distribution of total surplus, and discuss when delegation is more likely to dominate centralizationCorporate hierarchies, centralization, delegation, optimal contract.

INFORMATION GATHERING, DELEGATED CONTRACTING AND CORPORATE HIERARCHIES

In a typical corporate hierarchy, the manager is delegated the authority to make strategic decisions, and to contract with other employees. We study when such delegation can be optimal. In centralization, the owner retains the authority, which fails to motivate the manager to acquire valuable information, leading to suboptimal decisions and inefficient incentive provision to the worker. Beneficial delegation should necessarily motivate the manager to acquire information, which is possible only when the authority is delegated to the manager. We also document comparative statics results regarding the benefits of delegation and discuss when delegation is more likely to dominate centralization.Corporate hierarchies, information gathering, delegation, centralization.