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Performance standards and optimal incentives

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  • Gutiérrez Arnaiz, Óscar
  • Salas-Fumás, Vicente

Abstract

This paper analyzes incentive design when agents' effort influences an uncertain output governed by a random process with semi-heavy tails. We find that the second-best incentive contract pays an output-increasing but bounded fee with a shape resembling performance-standard contracts that pay a fixed salary plus a capped bonus. In this contract, the pay-performance sensitivity around the standard increases (decreases) with the frequency with which performance is measured and with the kurtosis (volatility) parameter of the performance probability distribution. We also find that the optimal maximum bonus increases with volatility but decreases with the kurtosis parameter of the performance distribution.

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  • Gutiérrez Arnaiz, Óscar & Salas-Fumás, Vicente, 2008. "Performance standards and optimal incentives," Journal of Accounting and Economics, Elsevier, vol. 45(1), pages 139-152, March.
  • Handle: RePEc:eee:jaecon:v:45:y:2008:i:1:p:139-152
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    References listed on IDEAS

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    Cited by:

    1. Oxholm, Anne Sophie, 2016. "Physician Response to Target-Based Performance Payment," COHERE Working Paper 2016:9, University of Southern Denmark, COHERE - Centre of Health Economics Research.
    2. Bernard Sinclair-Desgagné & Sandrine Spaeter, 2016. "Incentive Contracts and Downside Risk Sharing," Working Papers of BETA 2016-22, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    3. Zabel, Astrid & Roe, Brian, 2009. "Optimal design of pro-conservation incentives," Ecological Economics, Elsevier, vol. 69(1), pages 126-134, November.
    4. repec:spr:reaccs:v:22:y:2017:i:4:d:10.1007_s11142-017-9420-4 is not listed on IDEAS

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