MANAGERIAL INCENTIVES BASED ON ACQUISITION OF INFORMATION

In a moral hazard setting, we model the fact that the agent may get pr ivate signals about the final outcome of his effort before the public realization of this outcome. Actions affect both the distribution of t he outcome and the quality of the agent's private information. We comp are simple contracts, based on output only, with revelation contracts, based on output and messages about signals. Revelation contracts give the agent some discretionary power during the course of the relations hip; they are optimal if and only if lowering effort does not increase the quality of private information in the sense of Blackwell (1953). In the context of managerial compensation schemes, the revelation cont racts we analyze can be viewed as allowing the agent to exercise an op tion on the final profits before the realization of these profits. The theory thus provides an alternative justification of the widespread u se of stock options in managerial compensation schemes, as opposed to compensation schemes that rely only on salary, bonus, and (restricted) stock plans.