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doi: 10.3934/jimo.2021167
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## Equity-based incentive to coordinate shareholder-manager interests under information asymmetry

 1 School of Management, Hefei University of Technology, Hefei 230009, China 2 Key Laboratory of Process Optimization and Intelligent Decision-Making of Ministry of Education, Hefei 230009, China 3 Department of Industrial and Systems Engineering, University of Florida, Gainesville, FL 32611, USA 4 LANTA, High School of Economics, Moscow, Russia

*Corresponding author: Zhiping Zhou

Received  January 2021 Revised  July 2021 Early access September 2021

Fund Project: This research is supported by National Natural Science Foundation of China (Grant No. 72101077), and Anhui Provincial Natural Science Foundation (Grant No. 2008085QG341)

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.

Citation: Zhiping Zhou, Yao Yin, Mi Zhou, Hao Cheng, Panos M. Pardalos. Equity-based incentive to coordinate shareholder-manager interests under information asymmetry. Journal of Industrial & Management Optimization, doi: 10.3934/jimo.2021167
##### References:

show all references

##### References:
The sequence of events and actions
The impact of fairness preference on managerial effort levels
The impact of fairness preference on bonus coefficients
The impact of fairness preference on participants' benefits
The impacts of effort contributions and performance variances on shareholder's revenue
NOTATIONS AND PARAMETERS
 Symbol Meaning $a_d,a_c$ The managerial effort levels toward decision and coordination tasks, $a_d,a_c\ge 0$; $k(a_d,a_c)$ The manager's total effort cost, in which the parameter $\delta$ captures the task synergy effect; $p$ The firm's stochastic accounting profit with noise term ${\varepsilon _p} \sim N(0,\sigma_p^2)$; $\mu_d$ The contribution of manager's decision task effort on firm's accounting profit, $\mu_d >0$; $v$ The firm's stochastic stock value with noise term ${\varepsilon _v} \sim N(0,\sigma_v^2)$; $\mu_c,\lambda_p$ The contribution of coordination task effort and firm's accounting profit on its stock value respectively, $\mu_c >0,\lambda_p >0$; $\alpha_0,\alpha_p,\alpha_v$ The fixed compensation and incentive coefficients respectively, $\alpha_p,\alpha_v\in(0,1)$; $\beta,\hat\beta$ The manager's actual and reported fairness preference coefficients, $\beta,\hat\beta\in[0,\bar \beta]$; $\gamma$ The manager's comparative fair ratio between the participants'net incomes, $\gamma\in(0,1)$; $\rho$ The risk-averse coefficient of the manager, $\rho >0$; $\pi_m,\pi_s$ The net incomes of the manager and the shareholder respectively; $CE_m$ The manager's certainty equivalent based on his perceived utility $U_m$.
 Symbol Meaning $a_d,a_c$ The managerial effort levels toward decision and coordination tasks, $a_d,a_c\ge 0$; $k(a_d,a_c)$ The manager's total effort cost, in which the parameter $\delta$ captures the task synergy effect; $p$ The firm's stochastic accounting profit with noise term ${\varepsilon _p} \sim N(0,\sigma_p^2)$; $\mu_d$ The contribution of manager's decision task effort on firm's accounting profit, $\mu_d >0$; $v$ The firm's stochastic stock value with noise term ${\varepsilon _v} \sim N(0,\sigma_v^2)$; $\mu_c,\lambda_p$ The contribution of coordination task effort and firm's accounting profit on its stock value respectively, $\mu_c >0,\lambda_p >0$; $\alpha_0,\alpha_p,\alpha_v$ The fixed compensation and incentive coefficients respectively, $\alpha_p,\alpha_v\in(0,1)$; $\beta,\hat\beta$ The manager's actual and reported fairness preference coefficients, $\beta,\hat\beta\in[0,\bar \beta]$; $\gamma$ The manager's comparative fair ratio between the participants'net incomes, $\gamma\in(0,1)$; $\rho$ The risk-averse coefficient of the manager, $\rho >0$; $\pi_m,\pi_s$ The net incomes of the manager and the shareholder respectively; $CE_m$ The manager's certainty equivalent based on his perceived utility $U_m$.
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