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| Type | Working Paper |
| Scope | Discipline-based scholarship |
| Title | Optimal information design and incentive contracts with performance measure manipulation |
| Organization Unit | |
| Authors |
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| Institution | University of Zurich, University of California |
| Series Name | SSRN |
| Number | 3484199 |
| ISSN | 1556-5068 |
| Number of Pages | 49 |
| Date | 2019 |
| Abstract Text | We study how a firm owner motivates a manager to create value by optimally designing an information system and a compensation contract based on a manipulable performance measure. In equilibrium, the firm either implements a perfect or an uninformative system. The information system and the pay-performance sensitivity (PPS) of the compensation contract can be substitutes in a sense that the firm optimally combines a perfect information system with a low PPS or an uninformative system with a high PPS. Because the information design is endogenous, firms facing relatively high manipulation threat may offer financial incentives that are higher-powered than the ones offered by their peers facing lower manipulation threat. If the manager is in charge of implementing the information system, he chooses a perfect one unless the firm uses the information for internal control. The firm may prefer to commit to an internal control level before observing any information. |
| Free access at | DOI |
| Digital Object Identifier | 10.2139/ssrn.3484199 |
| Other Identification Number | merlin-id:19141 |
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