implicit and explicit : Cant they be complements? understand, sometimes

brain_wash_your

Does anyone understand why they can be complements sometimes?

justin88

I would say they can be complements, but it depends on the situation. Do you have a specific example that you are looking at?

Windjammer

They can be complements and substitutes according to the book.

A manager with high explicit incentives is willing to have high implicit incentives, i.e. they are going to get fired quickly if they underperform their index.

A manager could have high implicit incentives and low explicit incentives as well. This would take into account that the implicit incentive of firing was high enough to pay someone less money.

Another case is low and low. Low paying job but low chance of being fired and easy management.

bkballa

Yup But there is a section in reading 33 page 304 that says....


"A tightly financially constrained manager will accept both a lower level of performance-based rewards and a smaller probability of keeping her job after a poor performance........................The Heterogeneity in the intensity of financial constraints predicts a positive co movement under poor performance and low-powered incentives. Implicit and explicit incentives then appear to be complements in the sample."

strikethree

Yeah I never got that one. Seemed contradictory to the reading.

I moved on from that.

thommo77

makes sensee.


thx

jmh530

Schweser also had this section beyond wrong so it will be interesting for the Schweser only people.

The main point is they can be complements or substitutes. However their example seemed to substitutes and they called it complements.

In the example it appeared as if low implicit incentives meant low chance of keeping job, whereas the reading made it seem those were high implicit incentives.

Schweser has that at high implicit incentives.

Who knows?

The curriculum as a whole seems ugly when broken down. Lots of ambiguity and minutia that contradicts other minutia.



Edited 2 time(s). Last edit at Monday, May 30, 2011 at 10:40AM by Paraguay.

lcw77

Just gonna remember if i see "financially constrained "... means complements according to CFA text... *******.

zwjy

Are explicit and implicit incentives complements or substitutes? The threat of dis- missal or other interferences resulting from poor performance provides incen- tives for managers over and beyond those provided by explicit incentives. Explicit and implicit incentives are therefore substitutes: with stronger implicit incentives, fewer stocks and stock options are needed to curb managerial moral hazard.
(Level III Volume 4 Fixed Income and Equity Portfolio Management , 4th Edition. Pearson Learning Solutions p. 303).
<vbk:9780558655013#page(303)>

Windjam

Complements and substitutes in 2 places in the Corporate Governance reading:

1. Stocks/stock options and performance bonuses are COMPLEMENTS to one another because the former rewards long term performance and the latter rewards short term performance.

2. Implicit and explicit incentives are SUBSTITUTES. If you have more explicit incentives in place, no need for so much implicit incentives. If the threat of them losing their job is high, then you wouldn't need to throw money and stock options at them to motivate them to do a good job.



Edited 1 time(s). Last edit at Monday, May 30, 2011 at 10:41AM by CFAtime.