Economic Theory Seminar Series: Only time will tell: A theory of deferred compensation

We characterize optimal contracts in settings where the principal observes informative signals over time about the agent's one-time action. If both are risk-neutral contract relevant features of any signal process can be represented by a deterministic  informativeness process that is increasing over time. The duration of pay trades off the gain in informativeness with the costs resulting from the agent's liquidity needs. The duration is shorter if the agent's outside option is higher, but may be non-monotonic in the implemented effort level. We discuss various applications of our characterization, such as to compensation regulation or the optimal maturity structure of an entrepreneur's financing decisions.