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Bonus Pools, Limited Liability, and Tournaments

Author

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  • Budde, Jörg

Abstract

Tournaments have been objected as resulting from ad hoc restrictions to the contracting problem which are not easily justified. Taking into account that a performance measure might not be verifiable to a third party, however, a restriction to payments which sum up to a constant may be reasonable. The paper analyzes such fixed payment schemes with regard to their optimality and the relation to the special case of tournaments. It emerges that for a group of identical risk-neutral agents, the optimal fixed payment scheme is a tournament.

Suggested Citation

  • Budde, Jörg, 2007. "Bonus Pools, Limited Liability, and Tournaments," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 205, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    • Handle: RePEc:trf:wpaper:205
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    File URL: https://epub.ub.uni-muenchen.de/13347/1/205.pdf
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    Citations

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    Cited by:

    1. Imhof, Lorens & Kräkel, Matthias, 2014. "Bonus pools and the informativeness principle," European Economic Review, Elsevier, vol. 66(C), pages 180-191.
    2. Budde, Jörg, 2013. "Verifiable and Nonverifiable Information in a Two-Period Agency Problem," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 445, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    3. Kräkel, Matthias & Schöttner, Anja, 2010. "Technology choice, relative performance pay, and worker heterogeneity," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 748-758, December.

    More about this item

    Keywords

    bonus pools; relative performance evaluation; subjective performance evaluation; tournaments; verifiability;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • M54 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Management

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