Multi-task Principal-agent Model Research Articles

Exploration of the long-term performance-oriented incentive mechanism for balancing environmental and economic policies

In the implementation process of economic and environmental policy, a key concerned problem is the inability of some local officials to faithfully implement environmental policies made by the central government in China, as well as many other developing countries. In this paper, a multitask principal-agent model is established to make a comprehensive comparison on the role that the current incentive mechanism (CIM) and the long-term performance-oriented incentive mechanism (LTPOIM) play in policy implementation. In addition, both the incentive effect and the choice of incentive intensity in the LTPOIM are investigated. The results provide the insight that local officials may trade off the efforts of environment protection for economic growth in the CIM. However, local officials are incentivized to allocate higher efforts toward the implementation of environmental policies (IENP) to strengthen environment protection, or invest higher efforts toward IENP and the implementation of economic policies (IECP) to pursue the win-win situation for economy and environment in the LTPOIM. Besides, the chance of distributing higher efforts toward IENP and IECP in the case of complement tasks is higher than that in the case of substitute tasks. The optimal incentive intensities of long-term performance in the case of complement tasks are higher than those in the case of substitute tasks.

Does executive compensation mechanism balance performance with risk-taking? Evidence from China's banking system

PurposeIn this study, the authors demonstrate the inherent connections between bank risk-taking, performance and executive compensation in the banking sector of China by developing a theoretical model and performing empirical tests with simultaneous equation models.Design/methodology/approachThe authors construct a multi-task principal-agent model to capture agency problems in China, and the model can be extended to various cases. In empirical tests, simultaneous equation models are used to examine the theoretical predictions by eliminating endogenous concerns efficiently compared with the methods in the existing literature.FindingsThe results indicate that the regulator fails to provide bank managers with positive incentives to control risk, whereas the compensation guidance policy (2010) proposed by the CBRC alleviates this problem in China. Additionally, the authors established that shareholders reward bank managers for better and more stable performance. The authors propose the introduction of restricted stock options into the compensation design, as the existing compensation design fails to balance the performance and risk-taking of banks.Research limitations/implicationsFirst, the executive compensation structure and details in China are not available. In addition, the equity-based incentive compensation is forbidden. Therefore, this paper cannot provide more details about how the compensation structure affects bank manager behaviours. Secondly, the database consists only 25 listed commercial banks. Luckily, the assets of these banks could account for the vast majority of China's banking assets. The authors also expect that new methodologies such as machine learning and deep learning will be adopted in the research on bank risk management.Practical implicationsFirst, the regulator should optimise the compositions and payment rule of bank executive compensations. Secondly, it is advisable to adopt restricted deferred share reward or stock option compensation in due course. Thirdly, the regulator can require the banks that undertake excessive risks and troubled by moral hazard to increase the independent director proportion on the bank board according to the authors' empirical tests that higher independent proportion prevents the risk accumulations effectively. Fourthly, except for absolute compensation, the gap between executives' salary and average employee's income should be taken account.Originality/valueThis study provides a theoretical framework that incorporates the manager behaviours, executive compensation and bank regulations, and it provides empirical tests by solving endogenous concerns. Additionally, this study examines the effects of China's compensation guidelines issued in 2010. The authors believe that this study adds value to the existing literature by illustrating the compensation mechanism in China.

Simulation of the role of emphasis on scheduling in the optimal incentive scheme for marine engineering employee's routine job and information security compliance

In the organizational context of marine engineering, employee individual often prefers to concentrate herself to the day-to-day routine job, but to shirk the responsibilities of the Information Security Policies (ISPs) compliance, after she has been delegated by the employer to perform the two different tasks in the same time period. This would lead to negative influences on the security of marine information systems and the employee's routine job performance. In view of the task structures of employee's routine job and marine ISPs compliance, the variables of emphasis on scheduling are incorporated into a multi-task principal-agent model to explore the optimal incentive scheme to motivate and control the employees to select appropriate effort levels for conducting the two highly structured tasks. The role of emphasis on scheduling on the incentive intensities for the two tasks have been clarified through modeling and simulation, and the corresponding incentive tactics are suggested. The new two-task incentive scheme is expected to provide useful insight for understanding and controlling marine engineering employee's routine job and ISPs compliance behavior.

Green human resource management – A personnel economics perspective

The Stern-Stiglitz Report on carbon pricing emphasizes that environmental policy must not only cope with market failures, but also with government and organizational failures. Focusing on the latter, this paper investigates how some practices central to human resource management – employee selection and training, performance appraisal and rewards, employee discretion and empowerment – can be jointly deployed to direct managerial attention adequately. Using a static multi-task principal-agent model and standard monotone comparative statics tools, I derive predictions/prescriptions on how these practices should adjust as the firm's stakes in sustainability increase. These prescriptions notably include some qualifications concerning the outsourcing of environmental services and employee training, and some implications for public policy.

A note on organizational structure and environmental liability

This paper employs a multi-task principal-agent model to examine how a corporation’s organizational structure and liability rules for environmental damages affect the incentive schemes offered to managers. We derive environmental liability rules for risk averse managers under two alternative organizational structures: a product-based organization (PBO) and functional-based organization (FBO). For a PBO, it is shown that efficiency is independent of whether the firm or managers are liable for environmental damages; in a FBO it is optimal either to hold the firm liable for environmental damages or, equivalently, to only hold the environmental managers liable for damages. It is also shown that the two organizational structures are equally efficient when there is no correlation between environmental damages from products and no spillover between managerial effort across products or functions. Numerical results further reveal that beneficial spillovers between functions for the same product favours a PBO over a FBO; beneficial spillovers across functions favours a FBO.

Climate Change and Human Resource Management

The Stern-Stiglitz Report on carbon pricing emphasizes that environmental policy must not only cope with market failures, but also with government and organizational failures. Focusing on the latter, this paper investigates how some practices central to human resource management - employee selection and training, performance appraisal and rewards, employee discretion and empowerment - can be jointly deployed to direct managerial attention adequately. Using a static multi-task principal-agent model and standard monotone comparative statics tools, I derive predictions/prescriptions on how these practices should adjust as the firm's stakes in sustainability increase. These prescriptions notably include some qualifications concerning the outsourcing of environmental services and employee training, and some implications for public policy.

Sustainability of Public Services: Is Outsourcing the Answer?

The outsourcing of public services has acquired a prominent position in the political agenda of many countries in recent decades. This paper contributes an analysis of the outsourcing of a public service under a theoretical framework based on a multitask principal-agent model. For the management of the service, a contract is assumed that includes certain incentives to the contractor linked to the outcomes in two types of activities: the first related to cost saving, and the second related to the improvement of the quality of the service. The main results of the paper show, in the first place, the conditions under which the outsourcing of a public service is economically unfeasible. Additionally, the paper shows that, under perfect information conditions, the optimal incentives include the contractor retaining all the cost savings. On the contrary, under conditions of asymmetric information on the quality of the service, the contract should stipulate a certain distribution of the cost savings between the public authority and the contractor. More in general, the formalization of the model presented in this work can contribute to a better understanding of the role of the contracts, and therefore to their improvement.

Relational Contracts with Multitask Jobs

This paper analyzes a multitask Principal-Agent model in which the performance measures of some tasks are subjective and relational contract is needed for incentive provision. We find that rewarding the Agent based on a subjective measure that aggregates performance on multiple tasks can help ease the tension between motivating the Agent by offering a bonus and the Principal's temptation to renege on bonus payment, which helps reduce the threshold discount factor for relational contract to be self-enforcing. Consequently, when some dimensions of performance can not be objectively determined, it may be optimal not to use explicit for incentive provision even if other dimensions of performance can be objectively measured and there is no cost of writing explicit contracts. We therefore offer a novel explanation to excessively incomplete contracts observed in practice.

R&D outsourcing contract for the unverified value of tacit knowledge sharing

Purpose: The purpose of this paper is to provide a R&D outsourcing contract design framework to incent R&D outsourcing service providers sharing tacit and explicit knowledge. Design/methodology/approach: The author uses the principal-agent theory to builds multitask principal-agent model which focuses on two cases. One case is that the effort costs of explicit and tacit knowledge sharing are complementary, but another is the effort costs are substitutable. Findings: It was found that when the effort costs of explicit and tacit knowledge sharing are mutually complementary the multitask R&D outsourcing contract can incent tacit knowledge sharing. Moreover, the multitask R&D outsourcing contract can motivate the effort of explicit knowledge sharing to achieve system optimization, but it fails to motivate the effort of tacit knowledge sharing to achieve system optimization. Research limitations/implications: In this paper we only consider that the outsourcing relationship is short-term, so the multitask R&D outsourcing contract is formal. In fact, the outsourcing relationship may be long-term, so the multitask R&D outsourcing contract is informal. In the long-term cooperation the buyer can promise some reward which cannot be verified by court. service providers choose to trust the promise of the buyer first. Once the buyer don’t fulfill the promise, they not only lose the trust of service providers in this cooperation, but also lose social trust and are seen as dishonest enterprises. Practical implications: Our study provides a theoretical model for formulating an effective R&D outsourcing contract and promoting the transfer of explicit and tacit knowledge sharing. Originality/value: The paper extends prior literature by designing multitask R&D outsourcing contract to share the tacit knowledge. We not only consider the cost of substitution relationship between tacit knowledge and explicit knowledge, but also considered the cost of complementary relationship.

Incentives Research for Enterprises to Participate in VEP in the Multitask Principal-Agent Model

As a comprehensive environmental management system with a higher statutory environmental standard, Voluntary Environmental Program has become a trend of international environmental policy and the essence of it is a multi-agency task, in which government (principal) entrust enterprise (proxy) develop eco- nomic in the context of protecting the environment. Moreover, government is in a dominant position in the ef- fective implementation of voluntary environmental program, and their incentive to set different targets, under the voluntary environmental program, play a key role for the effective implementation of voluntary environ- mental program.

Dynamic Contracting: Accidents Lead to Nonlinear Contracts

We consider a dynamic multitask principal-agent model in which the agent allocates his resources on two tasks of different types: effort and accident prevention. We explicitly characterize the optimal contract as well as optimal effort and prevention actions applied by the agent. In contrast to the linear incentive scheme for effort, accident prevention leads to a log-linear punishment scheme if the agent is risk averse, becoming linear only if the agent is risk neutral. Both the sublinearity of the contract and the allocation of resources on the two tasks crucially depend on the risk aversion of the agent. Accident prevention ties up some of the agent's capacity and induces him to substitute resources away from effort to prevention.

Coordination Incentives, Performance Measurement, and Resource Allocation in Public Sector Organizations

Why are coordination problems common when public sector organizations share responsibilities, and what can be done to mitigate such problems? This paper uses a multi-task principal-agent model to examine two related reasons: the incentives to coordinate resource allocation and the difficulties of measuring performance. The analysis shows that when targets are set individually for each organization, the resulting incentives normally induce inefficient resource allocations. If the principal impose shared targets, this may improve the incentives to coordinate but the success of this instrument depends in general on the imprecision and distortion of performance measures, as well as agent motivation. Besides decreasing available resources, imprecise performance measures also affect agents' possibility to learn the function that determines value. Simulations with a least squares learning rule show that the one-shot model is a good approximation when the imprecision of performance measures is low to moderate and one parameter is initially unknown. However, substantial and lengthy deviations from equilibrium values are frequent when three parameters have to be learned. (Less)

Analyzing Schools as Firms: What Do the Economics of Organizations and Principal-Agent Theory Say About School Governance and Teacher Pay?

This paper applies several fundamentals of the economics of organizations and principal-agent theory to the governance of schools, the use of teacher incentive pay, the performance of schools, and school reform efforts. We analyze schools as we do firms. We then focus on using the results to understand two public policy issues: mandates regarding teacher pay and school competition/choice. An important element is the multitask principal-agent model where rewarding test scores may induce unwanted side consequences. Additionally, since school administrators have a great deal of situation-specific knowledge, school governance is crucial to enable them to act upon this information in appropriate ways. Differences between public and private organizations matter here, since organization administrators have very different incentives in these settings. Our modeling implies that many public school teachers will have attenuated incentives, but distorted towards test scores. Mandates to increase test score rewards might improve poorly performing schools, but only under certain conditions. Institutional reform is an alternative implicitly implied and considered by our approach. Here the goal is to alter schools administrators’ payoff to make them more responsive to educational value produced and less to political influences, thereby inducing more effective teacher incentive systems.

A Theory of Tax Avoidance -- Managerial Incentives for Tax Planning in a Multi-Task Principal-Agent Model

We derive determinants of tax avoidance by means of a multi-task principal-agent model. We extend prevailing models by integrating both corporate and individual income taxation as well as by including tax planning effort in the agent’s action portfolio. Our model shows novel and apparently paradoxical results regarding the impact of increased tax rates on efforts, risks, and incentive schemes. First, the principal’s after-tax profit can increase with a higher corporate tax rate. Second, tax planning effort can decrease in the corporate tax rate. Third, operational effort can increase with increasing corporate tax rates. We show that differences in productivities, differences in operational and tax risk and the correlations of these risks are crucial determinants for the optimal degree of tax avoidance. These determinants can explain why some firms are more tax aggressive than others and should therefore be considered in empirical studies. Related to this insight, we demonstrate that our results are consistent with recent empirical evidence.

Effort Substitution and Performance Shift of Multi-Tasking Mutual Fund Managers

We examine performance shift and managerial effort substitution for the practice of multi-tasking in the mutual fund industry. Using the pairing of newly issued and incumbent funds under concurrent management, we show that fund managers shift performance from incumbent funds to newly issued funds. Such outperformance of newly issued funds relative to incumbent counterparts can be attributed to managerial effort substitution. In order to examine managerial effort substitution, we compare the portfolio holdings of a newly issued fund that differ from the holdings of its incumbent counterpart and use the difference as a proxy for managerial effort substitution. We decompose the difference into three components: The same stocks as in the incumbent fund but with deviating portfolio weights, newly selected stocks that are not included in the incumbent fund, and old stocks that are included in the incumbent fund but not in the new fund. The empirical results indicate that the outperformance of newly issued funds against their incumbent counterparts can be attributed to the selection of new stocks in newly issued funds. Furthermore, we find that incentives embedded in the marginal impact of managerial effort on performance measures can help explain effort substitution and resulting performance shift. Overall, the results support the prediction of our multi-task principal-agent model.

Research on Influence of Manager’s Innovation Preference on Innovation-Decision Making

It is one of the key factors which cause “innovation dilemma” that managers prefer to support the sustaining innovation project. From the view of the manager’s innovation preference, the main propose of the paper is to study why it happened. The manager’s innovation preference will guide and motivate the staffs how to innovate, therefore it is appropriate to analyze it by using the principal agent theory. Conclusions can be got by establishing and analyzing a multi-task principal-agent model. First of all, the model basically explains why incumbent enterprises prefer adopting sustaining innovation and entrant enterprises are inclined to disruptive innovation project. Secondly, the selection rights of middle managers towards innovation projects determine the strategic direction of enterprises. Manager’s innovation preference is consistent with the innovation types of employees. At last, the paper suggests that incumbent enterprises should indeed establish self-organizations or spin-off organizations to better carry out disruptive business.

A Dynamic Multitask Model: Fixed Wage Contracts and Effort Allocation Problems

Holmstrom and Milgrom (1991) proposed a multitask principal-agent model in which the principal's utility is determined by several tasks the agent engages in. Their results depend on externalities between tasks and several assumptions related to the agent's eort. In this paper, we override certain assumptions (such as, the agent's eort can be negative and disutility is a non-increasing function of the eort up to some level) and obtain the similar outcomes in deriving …xed wage contracts and eort allocation problems. We further introduce timing, outputs that are unveri…able (such as leadership and collegial work), and …rm-speci…c knowledge as observed in actual labor markets and practices. This restructure also allows us to develop a multitask model without externalities, allowing us to study an optimal wage pro…le and …nd the optimal timing to sign a contract. Our model predicts that in industries where unveri…able outputs are valued, the more frequently the wage contract is renewed.

Research on Incentive Equilibrium Mechanism of Agent-Construction Relationship Based on Multitask Principal-Agent Model

Most of the Chinese scholars have simplified the relationship between the client and the agent-construction enterprise as a single-task principal-agent problem, which has ignored the important fact of multitasks, such as progress, quality and cost. In this paper, a multi-task principal-agent model with three tasks, i.e. progress, quality and cost, is constructed to analyze the optimal incentive contractual conditions and multi-task incentive equilibrium mechanism of the agent-construction enterprise, which can provide theoretical basis for the regulatory policy of government investment project.

Chain interdependencies, measurement problems and efficient governance structure: cooperatives versus publicly listed firms

We determine the circumstances when the absence of public listing, often believed to be a disadvantage, makes a cooperative the unique efficient governance structure. This is established in a multi-task principal–agent model, capturing that cooperatives are not publicly listed and their CEOs have to bring the downstream enterprise to value as well as to serve upstream member interests. Not having a public listing prevents the CEO from choosing the level of the downstream activities too high. Cooperatives are uniquely efficient when the upstream marginal product multiplied with a function increasing in the strength of the chain complementarities is higher than the downstream marginal product.

Both Market and Hierarchy: An Incentive-System Theory of Hybrid Governance Forms

We create a taxonomy of hybrid governance forms and develop a formal theory that predicts when a given hybrid form will be efficient. Our model is unique in that we consider cross-task synergies in a multitask principal-agent model, where hybrid forms result as principals try to motivate cooperation among agents indirectly through incentives, ownership, and formal authority. We conclude with a discussion of other mechanisms that might also help us understand and predict hybrid governance forms.