Liquidity and Manipulation of Executive Compensation Schemes

Several standard components of managerial compensation contracts have been criticized for encouraging managers to manipulate short-term information about the firm, thereby reducing transparency. This includes bonus schemes that encourage earnings smoothing, and option packages that allow managers to cash out early when the firm is overvalued. We show in an optimal contracting framework that these components are critical for giving long-term incentives to managers. The lack of transparency induced by the features of the contract makes it harder for the principal to engage in ex post optimal but ex ante inefficient liquidity provision to the manager.Executive compensation; earnings management; transparency

Arms Races and Negotiations

A state which does not desire an arms race may nevertheless acquire new weapons if it believes another state will acquire them. If each state assigns some arbitrarily small probability to the event that the other state has a dominant strategy to acquire more weapons, then a multiplier effect appears, and the unique Bayesian Nash equilibrium involves an arms race with probability one. However, if the prior probability that a player is a dominant strategy type is sufficiently small, then there is an equilibrium of the cheap-talk extension of the arms race game where the probability of an arms race is close to zero.Multiplier Effect, Bayesian Nash Equilibrium, Cheap-talk Extension, Arms Race Game

Optimal Design of Peer Review and Self-Assessment Schemes

A principal must decide whether or not to implement a project which originated with one of her employees. The employees have private information about the quality of the project. A successfully implemented project raises the inventor's chance of promotion, at his peer's expense, but a failed project may ruin the inventor's career. If the inventor is already ahead in his career, then he may be tempted to suppress his own ideas in order not to risk a big failure. If he is not ahead, then he is instead tempted to exaggerate the quality of his ideas in order to get ahead. The peer may either try to promote the inventor's bad ideas to see him fail, or to denigrate promising ideas to stop the inventor from getting ahead. Within the class of incentive compatible and renegotiation-proof mechanisms, self-assessment (without any peer reports) is optimal. Truthtelling can be guaranteed in different ways. For example, to avoid the exaggeration effect, the inventor can be promised some chance of promotion even if his project is cancelled, or he can be paid a relatively high wage when he is not promoted. We show how the optimal method depends on the parameters.

Multilateral negotiations with private side-deals: a multiplicity example

We study a multilateral negotiation procedure that allows for "partial agreements" in which responders are told only their own shares. Applications of our model include negotiations under "joint and several liability." Unlike previous models of multilateral bargaining with exit, we find that there are multiple equilibrium outcomes.imperfect information