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Delegation of Investment Decisions, and Optimal Renumeration of Agents

Author

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  • Lindbeck, Assar

    (Research Institute of Industrial Economics (IFN))

  • Weibull, Jörgen

    (Department of Economics)

Abstract

We analyze an investor who delegates information acquisition and investment decisions to an agent. The investor cannot monitor the agent’s effort or information. Optimal pay schemes contain bonuses that increase with the net return rate of the investment, but, unlike conventional contracts, at a decreasing rate. Moreover, investments with low return rates are penalized, again unlike conventional contracts. Nevertheless, it may be optimal for the investor to reward the agent above the agent’s reservation utility. We examine the role of the agent’s risk attitude for the shape of the pay scheme, and whether firing after bad investments is a more effective threat than reduced pay. We also analyze how the nature of the contract changes if the agent is given bargaining power.

Suggested Citation

  • Lindbeck, Assar & Weibull, Jörgen, 2017. "Delegation of Investment Decisions, and Optimal Renumeration of Agents," Working Paper Series 1171, Research Institute of Industrial Economics, revised 02 Aug 2020.
    • Handle: RePEc:hhs:iuiwop:1171
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    More about this item

    Keywords

    Delegation; Principal-agent; Principal-expert; Investment; Information aquisition; Rational inattention; Contract; Bonus; Penalty;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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