Prof. David Dicks (Baylor University)

Date: Wednesday, January 31^st, 2024
Time: 12:00 pm - 1:30 pm
Location: Schackstr. 4/III ; Room 314
Title: "Uncertainty, Contracting, and Beliefs in Organizations"
Abstract: We study the impact of uncertainty on optimal contracting in a multidivisional firm. Head-quarters contracts with division managers to induce effort. Uncertainty creates endogenous disagreement, aggravating moral hazard. By hedging uncertainty, headquarters design incentive contracts that reduce disagreement, lower incentive provision costs, thereby promoting effort. Because hedging uncertainty can conflict with hedging risk, optimal contracts differ from those in standard principal-agent models. Our model helps explain prevalence of equity-based incentive contracts and rarity of relative performance contracts, especially in firms facing greater uncertainty.