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On the Failures of Bonus Plans

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  • David Lagziel
  • Ehud Lehrer

Abstract

A decision maker (DM) has some funds invested through two investment firms. She wishes to allocate additional funds according to the firms' earnings. The DM, on the one hand, tries to maximize the total expected earnings, while the firms, on the other hand, try to maximize the overall expected funds they manage. In this paper we prove that, for every market, the DM has an optimal bonus policy such that the firms are motivated to act according to the interests of the DM. On the other hand, we also prove that the only policy that is optimal in every market, is independent of the actions and earnings of the firms.

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  • David Lagziel & Ehud Lehrer, 2015. "On the Failures of Bonus Plans," Papers 1505.04587, arXiv.org.
  • Handle: RePEc:arx:papers:1505.04587
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    References listed on IDEAS

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    1. Alvaro Sandroni, 2003. "The reproducible properties of correct forecasts," International Journal of Game Theory, Springer;Game Theory Society, vol. 32(1), pages 151-159, December.
    2. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    3. Shmaya, Eran, 2008. "Many inspections are manipulable," Theoretical Economics, Econometric Society, vol. 3(3), September.
    4. Lehrer, Ehud, 2001. "Any Inspection Is Manipulable," Econometrica, Econometric Society, vol. 69(5), pages 1333-1347, September.
    5. Dasgupta, Amil & Prat, Andrea, 2006. "Financial equilibrium with career concerns," Theoretical Economics, Econometric Society, vol. 1(1), pages 67-93, March.
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