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

brain_wash_your

Does anyone understand why they can be complements sometimes?

jmh530

I think that they're saying that it's a spectrum. With very weak implicit incentives, the two are complements. With very strong implicit incentives, the two are substitutes. So as you move along he spectrum from weak implicit incentives to strong implicit incentives, you move from complements to substitutes. So in their examples, the strength of the IMPLICIT incentives determined the degree of substitutability. You can probably argue the same about the strength of EXPLICIT incentives.

Analyze_This

It seems to come down to the definition of strong or not strong implicit incentives. Explicit incentives easy to figure out. The second situation seems exactly like the first however.

Roflnadal

Thus, 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, where the probability of turnover is determined by the composition of the board, the presence of takeover defenses, the specification of termination rights (in the case of venture capital or alliance financing) and other contractual arrangements. The heterogeneity in the intensity of financial constraints then predicts a positive comovement of turnover under poor per- formance and low-powered incentives. Implicit and explicit incentives then appear to be complements in the sample.
(Level III Volume 4 Fixed Income and Equity Portfolio Management , 4th Edition. Pearson Learning Solutions p. 304).
<vbk:9780558655013#page(304)>

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.

lcw77

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

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.

thommo77

makes sensee.


thx

strikethree

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

I moved on from that.