Dynamic Bonus Pools
We analyze a two-period agency problem with limited liability and nonverifiable information. The principal commits to a dynamic bonus pool comprising a fixed total payment that may be distributed over time to the agent and a third party. We find that the optimal two-period contract features memory. If the agent succeeds in the first-period, second-period incentives are weakened whereas higher-powered incentives are provided if he fails. The two-period bonus pool offers a complementary reason for why third-party payments are not commonly observed in practice.
Year of publication: |
2011-11-23
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Authors: | Budde, Jörg ; Hofmann, Christian |
Institutions: | Volkswirtschaftliche Fakultät, Ludwig-Maximilians-Universität München |
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