Why does incentive pay often depend on subjective rather than objective performance evaluations? After all, subjective evaluations entail a credibility issue. While the most plausible explanation for this practice is lack of adequate objective measures, I argue that subjective evaluations might...

Why does incentive pay often depend on subjective rather than objective performance evaluations? After all, subjective evaluations entail a credibility issue. While the most plausible explanation for this practice is lack of adequate objective measures, I argue that subjective evaluations might...

I explore the theoretical properties of earnings, prices, and compensation contracts under the assumption that strategic managers are evaluated based on audited financial reports of their own making. If auditors require managers to provide verifiable evidence substantiating the contents of their...

Agency theory is one of the most important foundational theories in management research, but it rests on tenuous cognitive assumptions. We combine classical agency theory with a realistic theory of the intrinsically imperfect human potential for interpersonal sensemaking. This allows us to...

I examine whether stochastic contracts benefit the principal in the setting of moral hazard and loss aversion. Incorporating that the agent is expectation-based loss averse and allowing the principal to add noise to performance signals, I find that stochastic contracts reduce the principal's...

I study the trade-off between private and verifiable interim performance evaluations under uncertainty. More uncertainty leads to higher agency costs if the interim evaluation is public and verifiable but lower agency costs if the interim evaluation is private and unverifiable.

We investigate a multi-agent moral-hazard model where agents have expectation-based reference-dependent preferences a la Koszegi and Rabin (2006, 2007). We show that even when each agent's probability of success in a project is independent, team incentives can be optimal. Because the agents are...

Previous literature documents that mutual funds' flows increase more than linearly with realized performance. I show this convex flow-performance relationship is consistent with a dynamic contracting model in which investors learn about the fund manager's skill. My model predicts that flows...

We investigate moral-hazard problems with limited liability where agents have expectation-based reference-dependent preferences. We show that stochastic compensation for low performance can be optimal. Because of loss aversion, the agents have first-order risk aversion to wage uncertainty. This...

We attempt to formulate and explain two types of self-fulfilling prophecy, called the Pygmalion effect (if a supervisor thinks her subordinates will succeed, they are more likely to succeed) and the Galatea effect (if a person thinks he will succeed, he is more likely to succeed). To this...