Lessons Lost in Linearity: A Critical Assessment of the General Usefulness of LEN Models in Compensation Research

As the Linear-Exponential-Normal (LEN) Principal-Agent model has gained in popularity, it has also increasingly been applied to problems inherently inconsistent with the assumptions underpinning this fragile framework. Concerns regarding LEN analysis in such cases are generally countered by appealing to the results' intuitive nature. When consistent with economic intuition, it is argued, the constraints the LEN framework imposes on such problems are likely non-consequential. This paper demonstrates in two simple cases that even seemingly intuitive results of non-optimal LEN analysis can be fundamentally different from the results that obtain from analysis of the unrestricted programs. Accordingly the paper makes a case for limiting LEN-type analysis to settings that are actually compatible with this framework.