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Budde, Jörg (March 2007): Bonus Pools, Limited Liability, and Tournaments. SFB/TR 15 Discussion Paper No. 205 [PDF, 196kB]


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.

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