performance comparisons and dynamic incentives it is well known that comparative performance information cpi can enhance efficiency in static principal agent relationships by improving the trade off between insurance and incentives in the design of explicit contracts in dynamic settings however there may be implicit as well as explicit incentives for example managerial career concerns and the ratchet effect in regulation we show that the dynamic effects of cpi on implicit incentives can either reinforce or oppose the familiar static insurance effect and in either case can be more important for efficiency the overall welfare effects of cpi are thus ambiguous and can be characterized in terms of the underlying information structure

dynamic incentives and retirement abstract this paper examines multi period compensation contracts when retirement is anticipated short term contracts in long term employment relationships are equivalent to a long term renegotiation proof contract the dynamic of incentive rates is determined by i how and in which periods managerial effort affects the contractible performance measures and by ii the time series correlation of error terms in performance reports the model explains why long term investments can decrease while incentive rates increase as managers approach retirement earnings persistence is negatively associated to earnings based incentive rates but towards retirement high earnings persistence implies increasing earnings based incentive rates

executive incentives and the horizon problem an empirical investigation abstract this paper investigates the hypothesis that ceos in their final years of office manage discretionary investment expenditures to improve short term earnings performance we examine the behavior of r d expenditures for a sample of firms in industries that have significant ongoing r d activities the results suggest that ceos spend less on r d during their final years in office however we find the reductions in r d expenditures are mitigated through ceo stock ownership there is no evidence that the reduced r d expenditures are associated with either poor firm performance or reductions in investment expenditures that are capitalized for accounting purposes

contracting theory and accounting abstract this paper reviews agency theory and its application to accounting issues i discuss the formulation of models of incentive problems caused by moral hazard and adverse selection problems i review theoretical research on the role of performance measures in compensation contracts and i compare how information is aggregated for compensation purposes versus valuation purposes i also review the literature on communication including models where the revelation principle does not apply so that nontruthful reporting and earnings management can take place the paper also discusses capital allocation within firms including transfer pricing and cost allocation problems

the dissent voting behaviour of central bankers what do we really know we examine the determinants of the dissent in central bank boards voting records about monetary policy rates in the czech republic hungary sweden the uk and the us in contrast to previous studies we consider 25 different macroeconomic financial institutional psychological or preference related factors jointly and use bayesian model averaging bma to formally assess the attendant model uncertainty we find that the rate of dissent is between 5 and 20 for the examined central banks our results suggest that most of the examined regressors including factors that capture the effects of inflation and output are not robust determinants of voting dissent this result suggests that unobserved characteristics of central bankers and different communication strategies drive the dissent rather than the level of macroeconomic uncertainty

eroi and the icelandic society abstract in this paper the societal energy return on investment eroi soc is estimated for iceland between 1960 and the present the results indicate that the overall eroi soc was around 27 1 in the early 1960s and was volatile for a period of time before stabilizing at around 45 1 in 1974 after establishing a strong mix of renewable energy these findings further show that icelanders have generally had access to energy sources with higher eroi than if they had relied on fossil fuels except for the period between 1963 and 1967 if they had relied on fossil fuels alone icelanders would now have access to combined resources with an eroi of around 16 1 likely too low for prosperity and an even lower eroi for long periods of time regarding policies this paper shows that relying on an energy grid mix with an eroi higher than 20 30 1 especially for island nations has the potential to raise the standard of living greatly for policymakers in island nations attention should be given to this relationship between high eroi energy sources with low price volatility and the standard of living

publicity of debate and the incentive to dissent evidence from the us federal reserve transparency in committee decision making may have clear benefits by making members more accountable to outside observers we consider one potential cost the possibility that publishing records of deliberations will make members more reluctant to offer dissenting opinions we construct a model that compares incentives for members with career concerns to voice dissent when deliberations occur in public or in private we test the model using an original dataset based on deliberations of the federal reserve s federal open market committee asking whether the fomc s 1993 decision to begin releasing transcripts of its meetings has altered incentives for dissent we find evidence that this is indeed the case there has been much recent discussion of the advantages of transparency in agency relationships both in and outside of government while research has attempted to model this issue theoretically there has been less progress with empirical tests a problem due no doubt in large part to the fact that it is difficult to make before and after comparisons of a shift in transparency often no data are available on an agent s actions prior to the establishment of transparency in this article we focus on one specific type of transparency publishing verbatim transcripts of committee meetings and one specific reason why this type of transparency might not be desirable the possibility that the quality of deliberation on a committee will suffer if the deliberations take place in public we develop a theoretical model that helps to identify the potential costs of this type of transparency and we then test the model empirically using an original dataset on deliberations of the federal reserve s federal open market committee fomc our dataset is unique in that it records views expressed by policymakers at fomc meetings and not just their official votes our empirical tests focus in particular on the observed effect of the institutional change that occurred in 1993 when the fomc decided to begin releasing transcripts of its meetings after a delay of five years transparency is a particularly relevant issue in monetary policy because it is commonly argued that when central banks take actions such as publishing macroeconomic forecasts revealing individual votes on monetary policy committees or releasing minutes of meetings this will lead to improved economic outcomes while simultaneously facilitating democratic accountability 1

employment horizon and the choice of performance measures empirical evidence from annual bonus plans of loss making entities we examine the extent to which employment horizon concerns affect the relative emphasis on financial versus nonfinancial performance measures in annual bonus plans we argue that managers of loss making firms are likely to voluntarily or forcibly depart in the near future and consequently have a shorter employment horizon loss making firms then need to increase the emphasis on forward looking nonfinancial performance measures to motivate long term effort of their managers thus we hypothesize that the emphasis on nonfinancial performance measures is greater in loss making than in profitable firms even after controlling for the informativeness of earnings we find consistent support for our hypothesis using different archival survey and field data sources and various proxies for short employment horizon and the emphasis on nonfinancial performance measures

empirical research on ceo turnover and firm performance a discussion abstract engel hayes wang and farrell whidbee provide new evidence on how firms weight alternative performance measures in making ceo retention and replacement decisions while their results are statistically significant firm performance continues to explain very little of the variation in ceo turnover i argue we have probably reached a point of diminishing returns in estimating logit models that focus on the relation between ceo turnover and firm performance measures we will have to consider other less explored issues to increase our understanding of ceo turnovers and replacements analyzing age related issues is one example

contractual contingencies and renegotiation in a dynamic model of asymmetric information between the owner of a firm and a manager we investigate the optimal set of contingencies on which an incentive contract should depend when renegotiation is possible in particular we characterize the circumstances in which the contracting parties find it desirable to deliberately restrict what the owner can monitor thereby limiting the contractible contingencies our findings thus provide an endogenous explanation for contract simplicity in contrast to those based on transactions costs or bounded rationality

renegotiation and information revelation over time the case of optimal labor contracts the paper analyzes the issue of commitment in grossman and hart s model of optimal labor contracts under asymmetric information about firm profitability we extend their framework by allowing employment to vary over time at equidistant intervals when both parties can precommit ex ante not to renegotiate the contract this replicates the grossman hart outcome each subperiod when precommitment is not possible information revealed through the contract can create pareto improving renegotiation opportunities and the issue of optimal information revelation arises the paper analyzes the impact of ex post pareto improving renegotiations on the optimal contract

managerial incentive problems a dynamic perspective the paper studies how a person s concern for a future career may influence his or her incentives to put in effort or make decisions on the job in the model the person s productive abilities are revealed over time through observations of performance there are no explicit output contingent contracts but since the wage in each period is based on expected output and expected output depends on assessed ability an implicit contract links today s performance to future wages an incentive problem arises from the person s ability and desire to influence the learning process and therefore the wage process by taking unobserved actions that affect today s performance the fundamental incongruity in preferences is between the individual s concern for human capital returns and the firm s concern for financial returns the two need be only weakly related it is shown that career motives can be beneficial as well as detrimental depending on how well the two kinds of capital returns are aligned it is well understood by now that informational externalities may place special demands on the organization of economic exchange simple price mediated markets will frequently fail in the presence of asymmetric information in that case more elaborate contractual arrangements have to be used as substitutes for the price system lately considerable effort has been devoted to the analysis of contracting under incomplete information with the objective to understand the range of economic institutions that emerge in response to the failure of the price system the analysis of moral hazard has played a prominent role in this development moral hazard problems arise when for some reason or another transacting parties cannot contract contingent on the delivery of the good for instance in buying labour services it may be that the amount of labour supplied is not directly observable precluding a simple exchange of wage for labour as a partial remedy to this problem an imperfect mutually observed signal about the supply of labour can be used as a proxy in the contract frequently output is taken as such a proxy the drawback is that output is often influenced by other factors than labour input which induce undesirable risk into the contract one is therefore faced with a tradeoff between allocating risk associated with incomplete observability and providing incentives for a proper supply of labour gaining insight into this tradeoff is important not only for understanding contracting in the small e g managerial incentive schemes but also because it is closely related to the fundamental tension between equity and efficiency in the society as a whole while our understanding of moral hazard has advanced a lot in past years it is clear that much work remains an important question that has received little attention until

renegotiation and optimality in agency contracts we analyse renegotiation in a hidden action principal agent model contract renegotiation offers are made by the agent a refinement is imposed on the principal s beliefs if precisely one action is optimal with respect to both the principal s and the agent s contracts the principal believes that that action has been taken with the refinement imposed perfect bayesian equilibrium allocations are identical to the second best in the classical principal agent model without renegotiation when renegotiation is led by the agent and when equilibria satisfy the refinement equilibrium allocations are ex ante efficient incentive contracting is a common mechanism for promoting ex ante investments and for avoiding ex post opportunistic behaviour in a long term or continuing economic relationship the classical principal agent model holmstrom 1979 grossman and hart 1983 is a natural framework for this class of problem in such a model a risk averse agent performs an action on behalf of a risk neutral principal the agent s action is unobservable and affects the principal s revenue in a random fashion the derivation and characterization of efficient compensation schemes have been the major focus in the principal agent literature generally the incentives to motivate a costly action from the agent take the form of profit sharing the agent s reward is made contingent on his random performance outcomes

optimal incentive contracts in the presence of career concerns theory and evidence this paper studies optimal incentive contracts when workers have career concerns concerns about the effects of current performance on future compensation we show that the optimal compensation contract optimizes total incentives the combination of the implicit incentives from career concerns and the explicit incentives from the compensation contract thus the explicit incentives from the optimal compensation contract should be strongest for workers close to retirement because career concerns are weakest for these workers we find empirical support for this prediction in the relation between chief executive compensation and stock market performance

short term contracts and long term agency relationships abstract long term contracts are valuable only if optimal contracting requires commitment to a plan today that would not otherwise be adopted tomorrow we show that commitments are unnecessary and hence short term contracts are sufficient if 1 all public information can be used in contracting 2 the agent can acess a bank on equal terms with the principal 3 recontracting takes place with common knowledge about technology and preferences and 4 the frontier of expected utility payoffs generated by the set of incentive compatible contracts is downward sloping at all times

contract renegotiation and coasian dynamics consider a long term relationship between a seller and a buyer whose valuation for a per period service or a durable good is private as trade progresses the valuation will be partially revealed and it may be impossible for the parties to commit ex ante not to take advantage of this we analyse this situation first by supposing that the parties can sign a sequence of short term contracts and secondly by supposing that they can sign a long term contract but cannot commit not to renegotiate it later we find a close relationship in the second case between the optimal long term contract and the non commitment outcome in the standard coasian durable good model our results also have implications for hidden information principal agent models

monetary policy preferences of individual fomc members a content analysis of the memoranda of discussion the memoranda of discussion provide detailed records of federal open market committee fomc meeting deliberations procedures are developed for coding the textual data in the memoranda and assessing the reliability of those codings the codings are then used in the estimation of parameters of individual fomc members reaction functions data from the 1970 to 1976 period are employed in the estimation in the future similar methods could be used to analyze newly released transcripts of fomc meetings held after 1976

endogenously chosen boards of directors and their monitoring of the ceo author s hermalin benjamin e abstract this paper develops a model in which the effectiveness of a board s monitoring of the ceo depends on the board s independence the independence of new directors is determined through negotiations implicit or explicit between the existing directors and the ceo the ceo s bargaining position and thus influence over the board selection process depends on an updated estimate of the ceo s ability based on prior performance many empirical findings about board structure and performance arise as equilibrium phenomena in this model we also explore the implications of this model for proposed regulations of corporate governance structures please contact the program in law and economics at boalt hall school of law uc berkeley berkeley ca 94720 for a copy of this paper

energy eroi and quality of life abstract the near and long term societal effects of declining eroi are uncertain but probably adverse a major obstacle to examining social implications of declining eroi is that we do not have adequate empirical understanding of how eroi is linked directly or indirectly to an average citizen s ability to achieve well being to evaluate the possible linkages between societal well being and net energy availability we compare these preliminary estimates of energy availability 1 eroi at a societal level 2 energy use per capita 3 multiple regression analyses and 4 a new composite energy index lambert energy index to select indicators of quality of life hdi percent children under weight health expenditures gender inequality index literacy rate and access to improved water our results suggest that energy indices are highly correlated with a higher standard of living we also find a saturation point at which increases in per capita energy availability greater than 150 gj or eroi above 20 1 are not associated with further improvement to society

dynamic incentives and responsibility accounting a comment abstract indjejikian and nanda j accounting and economics 27 1999 177 establish that lack of commitment results in an expected economic loss relative to a long term full commitment contract if there is inter period correlation of performance measures they attribute this loss to a ratchet effect we demonstrate the following first their proposed equilibrium is not sustained unless there is some form of limited commitment second these limited commitment assumptions need not induce a ratchet effect third the ratchet effect is neither necessary nor sufficient for an expected economic loss to occur the loss is due to the principal s inability to commit ex ante to the second period incentive rate

a contracting perspective on earnings quality abstract this paper analyzes the impact of signal to noise ratios and the autocorrelation of a performance measure on the principal s welfare in dynamic agencies with renegotiation we consider the impact of changes in the persistent transitory and reversible components of accounting earnings on its usefulness in valuation versus contracting increasing the persistent components and reducing the reversible components are generally desirable for valuation but not for contracting eliminating transitory components of earnings is generally desirable for valuation but not necessarily for contracting we discuss the contracting implications of differences in the autocorrelations of accounting earnings versus stock returns

long term short term and renegotiation on the value of commitment in contracting spot contracting generally involves efficiency losses relative to long term contracting it is proved here that short term contracting and renegotiation allow to achieve long run efficiency when transfers are not limited objectives are conflicting and no relevant asymmetric information appears at recontracting dates this last assumption excludes adverse selection but not moral hazard when technologies and preferences are time separable copyright 1990 by the econometric society

cooperation and competition in organizations a dynamic perspective abstract in static principal agent relationships cooperation and competition among agents both yield higher welfare than independent compensation both modes of job design improve the tradeoff between risk and explicit incentives in dynamic settings welfare is also affected by implicit incentives in particular the ratchet effect i characterize the effects of job design decisions on implicit incentives showing that they differ in nature from explicit incentive effects and may be the dominant ones even if a decision about job design improves the static risk incentive tradeoff it may worsen the ratchet effect by so much that welfare falls

eroi of different fuels and the implications for society abstract all forms of economic production and exchange involve the use of energy directly and in the transformation of materials until recently cheap and seemingly limitless fossil energy has allowed most of society to ignore the importance of contributions to the economic process from the biophysical world as well as the potential limits to growth this paper centers on assessing the energy costs of modern day society and its relation to gdp our most important focus is the characteristics of our major energy sources including each fuel s energy return on investment eroi the eroi of our most important fuels is declining and most renewable and non conventional energy alternatives have substantially lower eroi values than traditional conventional fossil fuels at the societal level declining eroi means that an increasing proportion of energy output and economic activity must be diverted to attaining the energy needed to run an economy leaving less discretionary funds available for non essential purchases which often drive growth the declining eroi of traditional fossil fuel energy sources and the effect of that on the world economy are likely to result in a myriad of consequences most of which will not be perceived as good

dynamic agency with renegotiation and managerial tenure this paper proves the renegotiation proofness principle for a dynamic len linear contracts exponential utility normal distributions model and examines the impact of repeated renegotiation on incentives and managerial tenure when performance information is serially correlated in addition to providing a general solution to a multiperiod agency problem with serially correlated performance measures this paper characterizes optimal managerial tenure turnover policies as a function of the time series properties of performance measures with negatively correlated performance measures the principal prefers longer managerial tenure and no turnover is optimal with positively correlated performance measures absent a switching cost turnover every period is optimal in the presence of a fixed switching cost interior optimal turnover policies exist if the performance measures are positively correlated switching costs are necessary but not sufficient for interior optimal tenure the optimal turnover policies present an alternative to theories of performance driven managerial turnover and are consistent with evidence that a majority of managerial turnovers are age related normal retirements

accounting policies in agencies with moral hazard and renegotiation we emphasize the role of accounting policies and their audit in an earnings management setting we use a two period agency in which three frictions interact the agent privately observes action or effort supply and output and the initial contract is subject to renegotiation this creates a setting in which both players behavior is of concern and importantly information rationing is efficient moreover this information rationing is directly interpretable as being produced by an accounting policy whose application is ensured by an auditor

leading indicator variables performance measurement and long term versus short term contracts in this article we develop a multiperiod agency model to study the role of leading indicator variables in managerial performance measures in addition to the familiar moral hazard problem the principal faces the task of motivating a manager to undertake soft investments these investments are not directly contractible but the principal can instead rely on leading indicator variables that provide a noisy forecast of the investment returns to be received in future periods our analysis relates the role of leading indicator variables to the duration of the manager s incentive contract with short term contracts leading indicator variables are essential in mitigating a holdup problem resulting from the fact that investments are sunk at the end of the first period with long term contracts leading indicator variables will be valuable if the manager s compensation schemes are not stationary over time the leading indicator variables then become an instrument for matching the future investment return with the current investment expenditure we identify conditions under which the optimal long term contract induces larger investments and less reliance on the leading indicator variables as compared with short term contracts under certain conditions though the principal does better with a sequence of one period contracts than with a long term contract

on repeated moral hazard with discounting in this paper we analyze optimal contracts in an infinitely repeated agency model in which both the principal and agent discount the future we show that there is a stationary representation of the optimal contract when the agent s conditional discounted expected utility is used as a state variable this representation reduces the multi period problem to a static variational problem which can be analyzed using standard variational techniques this reduction is used to obtain several properties of the contract

agent employment horizons and contracting demand for forward looking performance measures in this paper the principal rewards an agent s farsighted effort both in the short and long term with the short term reward based on a noisy forward looking performance measure and the long term reward based on a potentially less noisy trailing performance measure the main result is that optimal contracting weights depend on the agent s employment time horizon the shorter the agent s employment horizon the greater the emphasis on the forward looking performance measure and vice versa this implies that contracting on forward looking performance measures can be valuable in mitigating any adverse long term effects of employees myopically focusing on short term trailing performance measures