acase@tulane.edu / Despite the recent advocates for lengthening executive compensation duration to curb short-termism and promote long-term value creation, there is no study investigating whether long pay duration induces better investment decisions in the long run. Using a comprehensive measure of compensation duration, we find that CEOs with long pay duration are more likely to engage in large acquisitions. These acquisitions receive a significantly worse market reaction, and experience lower post-acquisition abnormal operating and stock performance compared with deals conducted by CEOs with short pay duration. Further analysis suggests that negative association between compensation duration and acquisition performance is driven by the use of time-vesting compensation plan. Duration of performance-vesting plans has no significant effect on M&A performance. Lastly, we find that CEOs are likely to engage in more risk-decreasing M&As, as long pay duration plans impose a higher firm risk to executives. The results highlight the complex nature of compensation duration and suggest that focusing on one dimension of compensation design is insufficient to create long-term shareholder value. / 1 / Qi-Yuan Peng

Prospective memory (PM) refers to memory for future intentions and involves several cognitive processes including memory, executive functions, and attention. PM has been studied extensively in clinical populations in which these cognitive processes are impaired but has only recently been studied in Huntington’s disease (HD), a neurodegenerative disease of the basal ganglia that is associated with neuropsychiatric, movement, and cognitive changes. The purpose of the present study was to further examine PM in HD, as well as investigate the influence of impulsivity on PM performance and whether a monetary incentive (either reward or loss) would improve PM performance. Results of the current study indicated that overall individuals with HD performed worse on a PM task compared to Controls. Control participants evidenced significantly better PM performance when they could have potentially lost money compared to a Neutral PM task. HD participants demonstrated a similar pattern of findings at a trending significance level. Impulsivity, as measured by the total score on the BIS-11, was not related to PM performance in either group. Controls scored significantly higher on a self-reported measure of prospective and retrospective memory (PRMQ) relative to HD participants with a trending association between the PRMQ and PM performance in Controls, but no association in HD participants. While there was a significant difference between groups on a recognition test of PM cues, there was no difference between groups on a free recall test of PM task instructions. These results build upon previous research that has found PM deficits in HD by investigating possible factors that may improve PM performance in this clinical population. Future research should investigate other motivational factors that may further increase PM performance in HD.

This dissertation investigates multi-period salesforce incentive contracting. The first chapter is an overview of the problems as well as the main findings. The second chapter continues with a review of the related literatures. The third and fourth chapters address a central question in salesforce contracting: how frequently should a firm compensate its sales agents over a long-term horizon? Agents can game the long-term contract by varying their effort levels dynamically over time, as discussed in Chapter 3, or by altering between a “bold" action and a “safe" action dynamically over time, as discussed in Chapter 4. Chapter 3 studies multi-period salesforce incentive provisions when agents are able to vary their demand-enhancing effort levels dynamically. I establish a stylized agency-theory model to analyze this central question. I consider salespeople's dynamic responses in exerting effort (often known as “gaming"). I find that long time horizon contracts weakly dominate short time horizon contracts, even though they enable gaming by the agent, because they allow compensation to be contingent on more extreme outcomes; this not only motivates the salesperson more, but also leads to lower expected payment to the salesperson. A counterintuitive observation that my analysis provides is that under the optimal long time horizon contract, the firm may find it optimal to induce the agent to not exert high effort in every period. This provides a rationale for effort exertion patterns that are often interpreted as suboptimal for the firm (e.g., exerting effort only in early periods, often called “giving up"; exerting effort only in later periods, often called “postponing effort"). I also discuss the implication of sales pull-in and push-out, and dependence of periods (through limited inventory) upon the structure of the optimal contracting. Chapter 4 examines multi-period salesforce incentive contracting, where sales agents can dynamically choose between a bold action with higher sales potential but also higher variance, and a safe action with limited sales potential but lower variance. I find that the contract format is determined by how much the firm wants later actions to depend on earlier outcomes. Making later actions independent of earlier demand outcomes reduces agents' gaming, but it also reduces an agent's incentive to take bold actions. When the two periods are independent, an extreme two-period contract with a hard-to-achieve quota, or a polarized two-period contract allowing agents to make up sales, can strictly dominate a period-by-period contract, because they induce more bold actions in earlier periods by making later actions dependent on earlier outcomes. However, when the two periods are dependent through a limited inventory to be sold across two periods, the period-by-period contract can strictly dominate the two-period contract, by allowing the principal more flexibility in adjusting the contract.

In standard contract-theoretic models, the underlying assumption is that an agent is purely selfish, and his objective is to maximize his own payoff. A large amount of empirical evidence has pointed out that many individuals are also motivated by other psychological considerations, such as fairness concerns and reciprocity. Theorists have been engaged in finding more realistic assumptions that are consistent with the ways in which economic agents behave in real life. Among the existing theories, the theory of inequity aversion developed by Fehr and Schmidt [35] has attracted enormous attention. It soon became a useful tool in behavioral contract theory, which capitalizes on the power of social preferences theories to enhance understanding of real-world contracting phenomena. The present thesis aims at contributing to the behavioral contract literature by investigating how inequality aversion preferences impact on the optimal contract design in a financial contracting environment and the agent's incentive in a career concerns experiment. Chapter 2 reviews some of the recent theoretical contributions to the development of the theories of reciprocity and fairness. Emphasis is placed on sketching the theories, demonstrating their abilities to explain experimental regularities and pointing out some potential problems that are inherent in the existing theories. In addition, we present a survey of the recent theoretical contributions linking inequality aversion and the theory of incentives, where the traditional selfish agent assumption is replaced by the more realistic assumption that the individual agent is also inequality-averse. Incorporating more realism into economic modelling, such as assuming some individuals are inequality-averse, appears to be a promising avenue for research in the theory of incentives, as it generates more refutable predictions that models based on the selfish agent assumption cannot offer. Chapter 3 analyzes a tractable two-period staged financing model in which a single principal interacts with an agent who is risk-neutral and inequality-averse, offering him an equity contract. We fully characterize the menu of the optimal sharing contracts. Our results show that inequality-aversion changes the structure of the optimal contract. More importantly, we show that it is more likely we will observe an equal sharing contract when the agent is inequality-averse. Our findings for efficiency comparison indicate that inequality-aversion exacerbates the distortions caused by moral hazard, which leads to a further downward distortion in terms of total social welfare in this staged financing context. Incorporating inequality-aversion into a dynamic staged financing game thus allows us to interpret real-world contractual arrangements in the venture capital industry where equal split contracts dominate. In Chapter 4, we revisit the innovative Holmström's-type career concerns experiment by Irlenbusch and Silwka [47]. In particular, we introduce inequality-aversion, a theoretical short cut for reciprocity, into the analysis and investigate if it is the missing link that potentially drives the results in the experiment. Two related but conceptually different models are considered. The complete information model confirms that inequality-aversion induces positive effort in the second period, but does not predict any differences in the effort choices across both periods in the revealed-ability setting. The incomplete information model's predictions conform more closely to the observations in the revealed-ability setting, and its predictions for the hidden-ability setting can partly explain the lower effort choices observed in the hidden-ability setting. Our analysis suggests that inequality-aversion is part of the missing link, but not all. Incorporating fairness intentions into the analysis should open more opportunities for explaining the experimental results in Irlenbusch and Silwka. / http://proxy.library.adelaide.edu.au/login?url= http://library.adelaide.edu.au/cgi-bin/Pwebrecon.cgi?BBID=1339820 / Thesis (Ph.D.) - University of Adelaide, Business School, 2008

The thesis contributes to the study of the relationship between competition and incentives, when asymmetric information is taken into account. Our main focus is the analysis of loan relationships. The first two chapters analyze the relationship between borrowers' financial constraints and endogenous fluctuations. We try to provide a potential departure from the traditional corporate finance theories by showing that the characteristics of firms' capital structure (i.e. their debt-to-equity ratio) can be affected by macroeconomic conditions. We construct a dynamic economy with asymmetric information in the credit market. The features of optimal securities issued at equilibrium are influenced by macroeconomic conditions. As a by-product, the debt-to-equity ratio in the overall economy will evolve according to the dynamics of aggregate variables. The remaining of the thesis develops a theoretical analysis of credit relationships where multiple financiers compete over the loan contracts they are offering to entrepreneurs-borrowers. To this extent, Chapter 3 proposes a unified framework to analyze the so-called literature on competing mechanisms and provides new results in terms of characterizing the equilibria of multi-principal multi-agent games. In the specific context of common agency games, we show that the introduction of a separability requirement on agent's preferences with respect to the contract offers she receives from principals is a sufficient condition to retrieve the Revelation Principle. Importantly, no restriction on principals' preferences is introduced. Chapter 4 investigates credit market relationships when competing lenders are explicitly considered. A reformulation of the traditional credit channel of Monetary Policy is then suggested. When lenders are strategically competing on their credit contract offers, positive-profit equilibria typically arise. Our analysis considers both the exclusive case and the non-exclusive one and it argues that monetary factors may affect the real sector mainly by modifying the structure of markets. The last chapter discusses the welfare implications of contractual externalities that arise in the presence of multiple financiers. We consider a scenario where a Social Planner is subject to the same informational constraints faced by principals in a simple model of the credit market. We identify conditions that sustain constrained-efficiency of market equilibria.

This paper analyzes the link between equity-based compensation and created incentives by (1) deriving a measure of incentives suitable for both linear and non-linear compensation contracts, (2) analyzing the effect of risk on incentives, and (3) clarifying the role of the agent's private trading decisions in incentive creation. With option-based compensation contracts, the average pay-forperformance sensitivity is not an adequate measure of ex-ante incentives. Pay-for-performance covaries negatively with marginal utility and hence overstates the created incentives. Second, more noise in the performance measure implies that the manager is less certain about the effect of effort on performance, which in turn makes her less willing to exert effort. Finally, the private trading decisions by the manager have first-order effects on incentives. By reducing her holdings of the market asset, the manager achieves an effect similar to "indexing" the stock or option grant, making explicit indexation of the contract redundant.

Over the last twenty years we have seen an increasing use of in-work tax subsidies to encourage labor supply among low-income groups. In Sweden, a non-targeted earned income tax credit was introduced in 2007, and was reinforced in 2008, 2009 and 2010. The stated motive of the reform was to boost employment; in particular to provide incentives for individuals to go from unemployment to, at least, part-time work. In this paper we try to analyze the extensive margin labor supply effects of the Swedish earned income tax credit reform up to 2008. For identification we exploit the fact that the size of the tax credit, as well as the resulting average tax rate, is a function of the municipality of residence and income if working. However, throughout the analysis we find placebo effects that are similar in size to the estimated reform effects. In addition, the results are sensitive with respect to how we define employment, which is especially true when we analyze different subgroups such as men and women, married and singles. Our conclusion is that the identifying variation is too small and potentially endogenous and that it is therefore not possible to use this variation to perform a quasi-experimental evaluation of the Swedish EITC-reform.

While the major goal of intergovernmental equalization transfers is the pursuit of equity, there are also a number of unintended consequences produced by equalization programs. In this dissertation we analyze the negative effect of equalization on the size of factors that are either used to measure the equalized jurisdictions' fiscal capacity in gap-filling equalization programs or are taxed with the purpose of further redistribution among jurisdictions in tax base sharing programs. We propose a theoretical framework in which the comparative statics analysis shows how equalization programs can induce substitution effect in the representative individual's consumption bundle via changes in the perceived price of the good that is associated with the size of the factor used to measure the equalized jurisdictions' fiscal capacity or taxed with the purpose of further redistribution among the jurisdictions. As the representative individual changes consumption of this good, the size of the factor also changes, resulting either in a reduction of the budget revenue collections or in the size of tax bases in the equalized jurisdictions. In the empirical part of this dissertation we examine the existence and economic significance of these effects using two cases of equalization programs. First, we examine the adverse effect of the equalization programs on revenue collections in Russia's regions where regional governments redistributed resources among their constituent municipalities based on the size of their actual revenue collections. Second, we examine the adverse effect of the tax base sharing program in the Twin Cities Metropolitan area of Minnesota on the size of commercial and industrial property where this property is taxed at a uniform rate and then reassigned to the municipalities in the inverse proportion to the size of their per capita real property. In both cases our empirical results support the hypothesis that the equalization programs adversely affect the size of the factors that are used to measure the equalized jurisdictions' fiscal capacity or that are taxed with the purpose of further redistribution among jurisdictions in tax base sharing programs.

Sustainable design - a study on sustainable design and its incentives and barriers The purpose of this study was to investigate the incentives and barriers existing within companies focusing on eco-design. The aim was also to examine the consumers’ thoughts on eco-design and sustainable products. A further aim was to try to concretize important lessons for future work on sustainable production and consumption. Two methods were used for completing this study; a literature study and a practical study consisting of interviews with companies focusing on eco-design and a survey among students. The result shows that durable goods over the last decades have had a varied revenue growth, showing an increasing trend over recent years. The result also shows a slightly increasing trend on sustainable consumption and production. The main incentives presented in the result were based on some form of recognition of the unsustainable attitude in our society. Among existing barriers the most prominent was associated to economic issues, ignorance and material problems. The result of the survey showed that consumers ranked factors related to eco-design among those who are least considered. For the work towards a sustainable future, people with a similar attitude as the ones involved in the interviewed companies are of great importance. There also seems to be a need for altered market conditions, but this would require a dramatic behavioral change.

This thesis consists of three chapters pertaining to issues of long-term relationships in labour markets. In Chapter 1, I analyze a model of a two-period advice game. The decision maker chooses to retain or replace the advisor after the first period depending on the first period events. Even though the decision maker and the advisor have identical preferences, this potential replacement creates incentive for the advisor to avoid telling the truth. I show the condition under which the decision maker can find a random retention rule that induces a truthful report from the advisor, and I characterize an optimal retention rule that maximizes the decision maker's expected payoff. In Chapter 2, I propose a search theoretic model of optimal employment contract under repeated moral hazard. The model integrates two important attributes of the labour market: workers' work incentive on the job and their mobility in the labour market. Even though all workers and firms are ex ante homogeneous, these two factors jointly generate (1) wages and productivity that increase with worker's tenure and (2) endogenous dynamic heterogeneity of the labour productivity of the match. The interaction of these factors provides novel implications for wage dispersion, labour mobility, and the business cycle behaviour of macroeconomic variables. Lastly, in Chapter 3, I quantitatively assess wage dispersion and business cycle implications of the model developed in Chapter 2. In terms of wage dispersion, the model with on-the-job search with wage-tenure contracts seems to accommodate sizable frictional wage dispersion. The model, however, generates very small productivity difference among workers, and shows weak evidence that the productivity difference generated by the endogenous variations in incentives is responsible for frictional wage dispersion. In terms of business cycle implications, workers' endogenous effort choice first amplifies the effect of productivity shock on unemployment rate. Second, responses of workers to productivity shocks generate marked difference between the effects of temporary productivity shock and that of permanent shock. Third, the analysis shows the importance of the distributional effect on macroeconomic variables during the transitory periods after a shock.