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Bonus Pools, Limited Liability, and Tournaments

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  • Budde, Jörg
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    Abstract

    Tournaments have been objected as resulting from ad hoc restrictions to the contracting problem which are not easily justified. Taking into account that a performance measure might not be verifiable to a third party, however, a restriction to payments which sum up to a constant may be reasonable. The paper analyzes such fixed payment schemes with regard to their optimality and the relation to the special case of tournaments. It emerges that for a group of identical risk-neutral agents, the optimal fixed payment scheme is a tournament.

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    File URL: http://epub.ub.uni-muenchen.de/13347/1/205.pdf
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    Bibliographic Info

    Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 205.

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    Date of creation: Mar 2007
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    Handle: RePEc:trf:wpaper:205

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    Related research

    Keywords: bonus pools; relative performance evaluation; subjective performance evaluation; tournaments; verifiability;

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