CFDP 1107

Information Externalities, Share-Price Based Incentives and Managerial Behaviour


Publication Date: July 1995

Revision Date: February 1997

Pages: 26


We survey recent theoretical research on the effects of short-term share-price based marginal incentive schemes. Such schemes can induce inefficient managerial behaviour in both hidden action and hidden type contexts. These problems arise from informational asymmetries: managers take actions to manipulate the information flow rather than to maximize firm value. More generally, imperfect transmission of information between managers and shareholders or between managers of different firms can lead to similar distortions even when the parties’ interests are aligned.


Published in Journal of Economic Surveys (March 1996), 10(1): 1-21 [DOI]