This paper deals with a moral hazard problem resulting from a combined hidden action and hidden information situation.

We consider a principal-multi agent model that features a three-tier hierarchy, defined as a setting where the principal contracts with an agent-manager and delegates to the manager some authority to contract with other agents. A key highlight is that incentive compensation, performance...

Options, restricted stock, bonuses tied to total shareholder return, and similar equity-based compensation contracts stipulate payments that depend on stock price. Any such contract is a function of shareholder value net of the compensation payment, because stock price (1) is proportional to...

Budgeting mechanisms help the CEO of a firm to restrict managerial discretion and therefore to mitigate the firm's agency problems. By using flexible budgets, the CEO allows the managers to efficiently adapt their actions to changing economic conditions. Alternatively, rigid budgets result in a...