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Managerial Incentives and Capital Management
Abstract
The paper shows how career concerns rather than effort aversion can induce a natural incongruity in risk preferences between managers and superiors. A model, based on learning about managerial talent, is developed to study second-best contractual remedies. We show that the optimal wage contract is an option of the value of the manager's human capital for insurance reasons and that consequently rationing of capital is often required to counterbalance the manager's resulting incentive to overinvest. Rationing is strictly superior to price decentralization, offering one reason for the prevalence of centralized capital budgeting procedures.
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Citations
Cited by
Multitask principal – agent analyses: Incentive contracts, asset ownership, and job design
Holmstrom, B., & Milgrom, P. (1991) · The Journal of Law, Economics, and Organization · doi:10.1093/jleo/7.special_issue.24 · Cited by 6,046
Self-citationThe Provision of Incentives in Firms
Prendergast, C. (1999) · Journal of Economic Literature · doi:10.1257/jel.37.1.7 · Cited by 3,338
Managerial Incentive Problems: A Dynamic Perspective
Holmstrom, B. (1999) · Review of Economic Studies · doi:10.1111/1467-937x.00083 · Cited by 3,172
Self-citationContracting theory and accounting
Lambert, R. A. (2001) · Journal of Accounting and Economics · doi:10.1016/s0165-4101(01)00037-4 · Cited by 1,050
Managerial Incentives for Short‐term Results
NARAYANAN, M. P. (1985) · The Journal of Finance · doi:10.1111/j.1540-6261.1985.tb02395.x · Cited by 835
Metadata
- Authors
- Holmstrom, B., & Costa, J. R. I.
- Venue
- The Quarterly Journal of Economics
- Publisher
- Oxford University Press (OUP)
- Published
- 1986-11
- Volume
- 101
- Issue
- 4
- Pages
- 835
- ISSN
- 0033-5533 (ISSN-L)
- OpenAlex
- W2033351293
- Cited by
- 671
- References
- 0
- FWCI
- 23.84
- Type
- journal article
- Language
- en
- Open access
- closed
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- CoChat. (2026). Citation check: Managerial Incentives and Capital Management. https://app.cochat.ai/papers/10.2307/1884180
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- Holmstrom, B., & Costa, J. R. I. (1986). Managerial Incentives and Capital Management. The Quarterly Journal of Economics. https://doi.org/10.2307/1884180
Data sources
Bibliographic data: Semantic Scholar, OpenAlex, Crossref.
Contains information from the Semantic Scholar Academic Graph Datasets, made available under the ODC Attribution License (ODC-BY 1.0).
Semantic Scholar’s data is described in: Kinney, R., et al. (2023). The Semantic Scholar Open Data Platform. arXiv:2301.10140.
