Equity-Based Incentives, Production/Service Functions And Game Theory : Additional Considerations

Equity Based Incentives include Employee Stock Options (ESOs), and substantially change the traditional production/service function, because ESOs/EBIs have different psychological impacts (motivation, or de-motivation), can create intangible capital (ie. Social Capital, Reputational Capital and Human Capital), and create different economic payoffs. Although Game Theory is a flawed concept, it can be helpful in describing interactions in ESO/EBIs transactions. ESOs/EBIs involve a two-stage game; and there are no perfect Nash Equilibria for the two sub-games. The large number of actual and potential participants in these games significantly complicates resolution of equilibria and increases the dynamism of the game(s), given that players are more sensitive to each other’s moves in such games. This article: i) builds on but differs from Nwogugu (2004; 2006); ii) analyzes how ESOs/EBIs dynamics affect traditional assumptions of production functions (in both the manufacturing and service sectors), iii) develops new models of multi-dimensional/combined games (two-stage games, dynamic games and differential games) inherent in ESO/EBIs transactions, iv) illustrates some of the limitations of game theory