CEO’s Compensation with
Effort and Project Choice

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Title:	CEO’s Compensation with Effort and Project Choice
Authors:	Xue, Xiaolin
Date:	2013-01-09
Issue Date:	2013-08-07 01:31:29 (UTC+0)
Abstract:	This paper considers the agency problem between a shareholder and his CEO when the CEO privately chooses not only the effort level but also the project to invest. First, I identify the optimal contract and the analysis focuses on how the presence of an unobservable project choice can crucially change the compensation schemes. Second, the tradeoff between the two managerial actions is examined. I provide the conditions under which a more risky or a less risky project than the shareholder desires is selected. Third, I study how the unobservability of the project choice decreases the shareholder’s expected profit and how it distorts the managerial decisions further than the unobservable effort does. At last, I look into the consequences for the shareholder of ignoring the unobservable project choice in designing the executive compensation scheme.
Relation:	2013中部學術財金研討會論文發表
Appears in Collections:	[Department of Finance] Proceedings

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