Florian Hoffmann, Roman Inderst, Marcus Opp - January 15, 2017
We characterize optimal contracts in settings where the principal observes informative signals over time about the agent’s one-time action. If both are risk-neutral contract relevant features of any signal process can be represented by a deterministic informativeness process that is increasing over time. The duration of pay trades off the gain in informativeness with the costs resulting from the agent’s liquidity needs. The duration is shorter if the agent’s outside option is higher, but may be non-monotonic in the implemented effort level. We evaluate effects of regulatory proposals that mandate the deferral of bonus payments and use of clawback clauses.