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Title: On the Value of Improved Informativeness
Authors: Chaigneau, Pierre
Keywords: Executive compensation
Pay-for-luck
Principal-agent model
Relative performance evaluation
Stock-options
Issue Date: 2012-02
Series/Report no.: Cahiers du CIRPÉE;12-05
Abstract: One of the main predictions of principal-agent theory, the “informativeness principle”, is often violated in practice. We propose an explanation that emphasizes the role played by the change in the form of the optimal contract that follows an improvement in informativeness. We show that the overall gains from a less noisy performance measure emanate from two sources: the direct effect of a change in the volatility of the performance measure, and the effect of the induced change on the form of the optimal compensation contract. We emphasize that the direct effect can either largely under-estimate or largely overtimate the overall gains from improved informativeness, and we show that these gains can even be nil in some instances.
URI: https://depot.erudit.org/id/003582dd
Appears in Collections:Cahiers de recherche du CIRPÉE

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