Math-Fi seminar on 26 Jan.

Date : 26 Jan. (Thu.)
Place: W.W. 6th-floor, Colloquium Room
Time : 16:30-18:00
Speaker: Keiichi Hori (Ritsumeikan University)
Title: Dynamic Contract and Discretionary Termination Policy under Loss Aversion

Abstract: We explore how the timings of compensation and contract termination are jointly and optimally determined in a continuous-time principal-agent model under the discretionary termination policy of investors (the principal) when the agent has loss averse preferences. We show that the larger replacement cost of the agent induces investors to reward the agent later and to be more likely to fire the agent at the contract termination, but does not necessarily induce investors to terminate the contract relation later. We also indicate that the larger degree of loss aversion induces investors to reward the agent earlier and to be less likely to fire the agent at the contract termination if the reference point is sufficiently small or large; however, it does not necessarily induce investors to terminate the contract relation later. Our theoretical findings provide several new empirical implications of the backloaded compensation and forced turnover of managers. Our model also shows that the mandatory deferral regulation of incentive pay induces investors to terminate the contract relation earlier and results in the more frequent replacement of managers. The endogenous determination of the utility reference point does not affect our main results.

立命館大学数理科学科