TY  - JOUR
AU  - Edmans,Alex
AU  - Gabaix,Xavier
AU  - Sadzik,Tomasz
AU  - Sannikov,Yuliy
TI  - Dynamic Incentive Accounts
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15324
PY  - 2009
Y2  - September 2009
UR  - http://www.nber.org/papers/w15324
L1  - http://www.nber.org/papers/w15324.pdf
N1  - Author contact info:
Alex Edmans
The Wharton School
University of Pennsylvania
2460 Steinberg Hall - Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
Tel: 215/746-0498
Fax: 215/898-6200
E-Mail: aedmans@wharton.upenn.edu

Xavier Gabaix
New York University
Finance Department
Stern School of Business
44 West 4th Street, 9th floor
New York, NY 10012
Tel: 212-998-0257
Fax: 212-995-4233
E-Mail: xgabaix@stern.nyu.edu

Tomasz Sadzik
Department of Economics
19 West 4 Street, Suite 612
New York, NY 10012
E-Mail: tsadzik@nyu.edu

Yuliy Sannikov
Department of Economics
208 Fisher Hall
Princeton University
Princeton, NJ 08544
E-Mail: sannikov@gmail.com
AB  - Contracts in a dynamic model must address a number of issues absent from static frameworks. Shocks to firm value may weaken the incentive effects of securities (e.g. cause options to fall out of the money), and the impact of some CEO actions may not be felt until far in the future. We derive the optimal contract in a setting where the CEO can affect firm value through both productive effort and costly manipulation, and may undo the contract by privately saving. The optimal contract takes a surprisingly simple form, and can be implemented by a "Dynamic Incentive Account." The CEO's expected pay is escrowed into an account, a fraction of which is invested in the firm's stock and the remainder in cash. The account features state-dependent rebalancing and time-dependent vesting. It is constantly rebalanced so that the equity fraction remains above a certain threshold; this threshold sensitivity is typically increasing over time even in the absence of career concerns. The account vests gradually both during the CEO's employment and after he quits, to deter short-termist actions before retirement.
ER  -