Bonus Pools, Limited Liability, and Tournaments

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

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.

• Item Type: Paper
• Keywords: bonus pools, relative performance evaluation, subjective performance evaluation, tournaments, verifiability
• Faculties: Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems; Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > B4 - Die Gestaltung von Turnieren im Rahmen der Corporate Governance
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: D82, M52, M54
• Language: English