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| Author: | Khanna, N. |
| Title: | Optimal contracting with moral hazard and cascading. |
| Journal: | Review of Financial Studies
1998 : FALL, VOL. 11, p. 559-596 |
| Index terms: | PRODUCT MIX MARKETING MIX DECISION MAKING CONTRACTS |
| Language: | eng |
| Abstract: | The author identifies optimal incentive contracts for managers of firms competing in the product market. Since signals are likely to be correlated, firms that decide later get additional information from the actions of earlier firms. This impacts effort choice. Decision quality is also affected if later managers disregard their own signals and blindly imitate preceding decisions. In a competitive environments such cascading hurts profits. Contracts that solve both moral hazard and cascading problems typically put more weight on firm profits, making them expensive. Shareholders choose contracts that maximize their net surplus. |
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