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But Is It Myopia? Risk Aversion and the Efficiency of Stock‐Based Managerial Incentives
Author(s) -
Carmel Jonathan
Publication year - 2008
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1530-9134.2008.00186.x
Subject(s) - incentive , stock (firearms) , economics , risk aversion (psychology) , term (time) , emphasis (telecommunications) , econometrics , microeconomics , computer science , financial economics , expected utility hypothesis , telecommunications , engineering , physics , mechanical engineering , quantum mechanics
This paper points out that stock incentives do not lead to myopia unless they result in more emphasis on the short‐term than would occur under an optimal contract. It shows that myopia findings relative to the standard used throughout the literature (first‐best efficiency) are often reversed when evaluated relative to the relevant standard of optimal contracting. Results reported by the previous literature to be myopia often in fact have excessive emphasis on the long‐term. The paper solves in closed‐form for the region in parameter space which gives rise to these reversals and shows that it can be arbitrarily large .