Leadership

Optimal Compensation Contracts For Optimistic Managers

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Executive Summary

Managers with anticipatory emotions have higher current utility if they are optimistic about the future. The authors study an employment contract between an (endogenously) optimistic manager and realistic investors. The manager faces a trade-off between ensuring that the chosen levels of effort reflect accurate news and savoring emotionally beneficial good news. They show that optimism may exacerbate incentive problems. Specifically, investors and manager agree over the optimal news recall when the manager's weight on anticipatory utility is low.

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