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Bonus pools and the informativeness principle

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  • Imhof, Lorens
  • Kräkel, Matthias

Abstract

Previous work on moral-hazard problems has shown that, under certain conditions, bonus contracts create optimal individual incentives for risk-neutral workers. In our paper we demonstrate that, if a firm employs at least two workers, it may further benefit from combining worker compensation via a bonus-pool contract and relative performance evaluation. Such combination leads to saved rents under a wide class of luck distributions. In addition, if the employer is wealth-constrained, complementing individual bonus contracts by the possibility of pooling bonuses can increase the set of implementable effort levels. All our results hold even though workers' outputs are technically and stochastically independent so that, in view of Holmstrom's informativeness principle, individual bonus contracts would be expected to dominate bonus-pool contracts.

Suggested Citation

  • Imhof, Lorens & Kräkel, Matthias, 2014. "Bonus pools and the informativeness principle," European Economic Review, Elsevier, vol. 66(C), pages 180-191.
  • Handle: RePEc:eee:eecrev:v:66:y:2014:i:c:p:180-191
    DOI: 10.1016/j.euroecorev.2013.12.004
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    Cited by:

    1. Imhof, Lorens & Kräkel, Matthias, 2014. "Tournaments with gaps," Economics Letters, Elsevier, vol. 122(2), pages 211-214.

    More about this item

    Keywords

    Contract; Hazard rate; Informativeness principle; Limited liability; Relative performance;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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