Managerial Attention Allocation in Optimal Incentive Contracts
Abstract: This paper presents the introduction of managerial attention allocation constraints in optimal incentive contracts. There is an agent who provides non-contractible effort in a number of tasks and a principal who designs a linear incentive contract, composed by a variable and a fixed factor, and monitors the effort of the agent. The framework in Holmstrom and Milgrom (1991) is extended to allow the principal to decide the amount of monitoring allocated in each task. More attention allocated to a given task improves the task contractibility due to a decrease in the uncertainty about the effort provided by the agent. The principal allocates the same level of attention and provides the same incentive contract across tasks under symmetric decreasing returns to scale in production and monitoring. However, when there are increasing returns to scale in the monitoring technology, the principal offers an unbalanced incentive contract and allocates asymmetric amounts of attention across tasks.
