This paper reexamines the linear schedule of compensation as a tool for providing incentives to managers when contractible output is a function of costly effort and a random shock. Two puzzling situations compatible with linear schemes of compensation are presented. First, if the model parameters are such that the optimal participation on output is below 50%, the variable compensation turns out to have a negative effect on manager's utility. Second, if it is below 25%, linear incentives allow situations in which larger utilities are reached by means of smaller rewards. © Springer-Verlag 2007.
|Journal||Spanish Economic Review|
|Publication status||Published - 1 Jun 2007|
- Certainty equivalent
- Linear schedules
- Moral hazard