Equity-based incentive to coordinate shareholder-manager interests under information asymmetry

Journal of Industrial and Management Optimization. 2021. P. 1–24.

Zhou Z., Yin Y., Zhou M., Cheng H., Pardalos P. M.

The shareholder’s interest oriented from business operation relies on opportunism regulation of the manager under asymmetry. Effective motivation incentives should be exploited to facilitate the manager’s effort devotion enthusiasms. This paper establishes a theoretic model in which the shareholder offers equity-based incentive to a fairness-preferred manager to coordinate their interest conflicts and maximize her expected revenue. The manager exerts unverifiable levels of efforts toward both decision and coordination tasks making the most of his private information about fairness preference. Two interrelated performance measures on different hierarchical levels are considered for contracting purposes. In each situation, we derive the equilibrium effort choices and incentive coefficients of both participants, and investigate how these decisions are affected by fairness preference. Research findings suggest that the incorporation of firm equity dominates pure profit incentive in eliciting high effort levels toward two distinctive managerial tasks. Besides, the equity-based incentive weakens the perceived unfairness and facilitates the participants’ expected revenue. Comparative statics and numerical analysis are conducted to demonstrate our results and the effectiveness of the proposed equity-based incentive. Finally, we summarize the contributions of this paper and put forward directions for further study.

Keywords: asymmetric information, Stackelberg game, Equity-based incentive, managerial task, performance measure

Publication based on the results of: Theoretical and algorithmic aspects of network analysis algorithms (2021)