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Dynamic Bonus Pools

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  • Budde, Jörg
  • Hofmann, Christian

Abstract

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.

Suggested Citation

  • Budde, Jörg & Hofmann, Christian, 2011. "Dynamic Bonus Pools," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 443, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    • Handle: RePEc:trf:wpaper:443
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    References listed on IDEAS

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    Cited by:

    1. Budde, Jörg, 2013. "Verifiable and Nonverifiable Information in a Two-Period Agency Problem," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 445, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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