Interesting write-up of the prize-winning research into contract theory and "optimal" incentives.
In his first major contribution, Holmström showed what set of performance measures should be part of the contract. His so-called "informativeness principle" basically says that any performance measure which provides additional information about the actions the agent took should be part of the contract.
A striking implication of this is the managers should not be rewarded for luck. An oil company CEO who cannot control the oil price should not get a windfall gain (or loss) from movements in the oil price. The optimal contract should filter that out. To use a topical example, bank CEOs should not benefit from a general rise in the banking sector (say because of interest rates) – their stock options should be indexed to the stock prices of their competitors.
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[ 2.8 ms ] story [ 15.6 ms ] threadIn his first major contribution, Holmström showed what set of performance measures should be part of the contract. His so-called "informativeness principle" basically says that any performance measure which provides additional information about the actions the agent took should be part of the contract.
A striking implication of this is the managers should not be rewarded for luck. An oil company CEO who cannot control the oil price should not get a windfall gain (or loss) from movements in the oil price. The optimal contract should filter that out. To use a topical example, bank CEOs should not benefit from a general rise in the banking sector (say because of interest rates) – their stock options should be indexed to the stock prices of their competitors.
Also: https://www.nobelprize.org/nobel_prizes/economic-sciences/la...