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On the optimality of linear contracts to induce goal-congruent investment behaviour

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  • Thomas Pfeiffer
  • Louis Velthuis

Abstract

It has become increasingly popular in practice to implement incentive systems that create goal-congruent investment behaviour between central and divisional management. In the following paper, it is shown that only linear contracts enable goal-congruent investment decisions if central management does not have information about the investment project. This might cast a new light on why linear compensation schemes are often used in practice.

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  • Thomas Pfeiffer & Louis Velthuis, 2005. "On the optimality of linear contracts to induce goal-congruent investment behaviour," Applied Economics Letters, Taylor & Francis Journals, vol. 12(4), pages 207-211.
    • Handle: RePEc:taf:apeclt:v:12:y:2005:i:4:p:207-211
    DOI: 10.1080/1350485042000329095
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    References listed on IDEAS

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    1. Reichelstein, S, 2000. "Providing managerial incentives: Cash flows versus accrual accounting," Journal of Accounting Research, Wiley Blackwell, vol. 38(2), pages 243-269.
    2. Rogerson, William P, 1997. "Intertemporal Cost Allocation and Managerial Investment Incentives: A Theory Explaining the Use of Economic Value Added as a Performance Measure," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 770-795, August.
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    Cited by:

    1. Thomas Pfeiffer, 2006. "Zur „Doppelzählungsproblematik“ bei der Kapitalkostenbestimmung bei internem Risikoverbund und Kapitalmarktinteraktion," Schmalenbach Journal of Business Research, Springer, vol. 58(55), pages 79-108, January.

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