Motivating Entrepreneurial Activity in a Firm

Antonio E. Bernardo; Hongbin Cai; Jiang Luo

doi:10.1093/rfs/hhn029

Motivating Entrepreneurial Activity in a Firm

Antonio E. Bernardo¹; Hongbin Cai^2,3; Jiang Luo⁴

¹ University of California, Los Angeles · ² Economic Policy Institute · ³ Peking University · ⁴ Nanyang Technological University

Review of Financial Studies 2009

We examine the problem of motivating privately informed managers to engage in entrepreneurial activity to improve the quality of the firm's investment opportunities. The firm's investment and compensation policy must balance the manager's incentives to provide entrepreneurial effort and to report private information truthfully. The optimal policy is to underinvest (compared to first-best) and provide weak incentive pay in low-quality projects and overinvest (compared to first-best) and provide strong incentive pay in high-quality projects.

DOI: 10.1093/rfs/hhn029
Volume: 22 (3)
Pages: 1089-1118
Language: en
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