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Bonus and Penalties in Incentive Contracting

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  • Tracy R. Lewis

Abstract

Moral hazard in risk-sharing agreements often occurs when an agent's actions cannot be observed directly. We consider the case in which there is some observable measure of the agent's performance that varies continuously with the agent's effort. We analyze contracts that allow for lump-sum bonus and penalty payments contingent on performance and generally find them preferable to contracts in which the agent's reward depends continuously on observed performance.

Suggested Citation

  • Tracy R. Lewis, 1980. "Bonus and Penalties in Incentive Contracting," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 292-301, Spring.
    • Handle: RePEc:rje:bellje:v:11:y:1980:i:spring:p:292-301
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    Cited by:

    1. Inés Macho-Stadler & David Pérez-Castrillo, 2018. "Moral hazard: Base models and two extensions," Chapters, in: Luis C. Corchón & Marco A. Marini (ed.), Handbook of Game Theory and Industrial Organization, Volume I, chapter 16, pages 453-485, Edward Elgar Publishing.
    2. S. Belhaiza & S. Charrad & R. M’Hallah, 2018. "On the Performance of Managers and Controllers: A Polymatrix Game Approach for the Manager–Controller–Board of Directors’ Conflict," Journal of Optimization Theory and Applications, Springer, vol. 177(2), pages 584-602, May.
    3. W. Ekins & Andrew Brooks & Gregory Berns, 2014. "The neural correlates of contractual risk and penalty framing," Journal of Risk and Uncertainty, Springer, vol. 49(2), pages 125-140, October.
    4. Zou, Liang, 1992. "Threat-based incentive mechanisms under moral hazard and adverse selection," Journal of Comparative Economics, Elsevier, vol. 16(1), pages 47-74, March.
    5. O'Brien, Daniel P., 2017. "All-units discounts and double moral hazard," Journal of Economic Theory, Elsevier, vol. 170(C), pages 1-28.

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