Premium
Compensation Convexity without Utility Restriction
Author(s) -
Gong Jiong,
Jiang Ping,
Xing Xiaochuan
Publication year - 2018
Publication title -
australian economic papers
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 15
eISSN - 1467-8454
pISSN - 0004-900X
DOI - 10.1111/1467-8454.12129
Subject(s) - convexity , moral hazard , stock (firearms) , salient , economics , marginal utility , expected utility hypothesis , compensation (psychology) , executive compensation , microeconomics , hazard , function (biology) , econometrics , mathematical economics , computer science , financial economics , incentive , engineering , psychology , mechanical engineering , artificial intelligence , psychoanalysis , chemistry , organic chemistry , evolutionary biology , biology
We develop an optimal contract model on the use of stock options for chief executive officer compensation under the Mirrlees–Rogerson moral hazard framework. We find that convexity, as know as, the use of stock options, can arise with a broader range of agent utility functions than allowed by Hemmer et al . ([Hemmer, T., 2000]). We characterise the necessary conditions regarding the behaviour of the agent's marginal risk tolerance for both the concavity and convexity cases of the likelihood‐ratio function. We find stock options need to be used more intensively, when the agent displays a higher marginal risk tolerance and when the realised task output is higher.