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Adverse selection, contract design and investment distortion

Abstract:

We examine the design of compensation contracts and determination of investment policies when a manager has private information regarding the effect of investment on both the firm's cash flows and the private benefits she is able to extract from employment. We show that, in general, the optimal mechanism is characterized by a menu of salary and option contracts. When the manager's private information relates only to the firm's cash flows, the firm overinvests relative to the Pareto optimal le...

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Publication date:
1992-01-01
UUID:
uuid:720db983-0f61-4de6-83bd-21d2f2645ea2
Local pid:
oai:eureka.sbs.ox.ac.uk:1151
Deposit date:
2011-11-18

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