Linear contracts as incentives: A puzzle

    Research output: Contribution to journalArticleResearchpeer-review

    1 Citation (Scopus)

    Abstract

    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.
    Original languageEnglish
    Pages (from-to)153-158
    JournalSpanish Economic Review
    Volume9
    DOIs
    Publication statusPublished - 1 Jun 2007

    Keywords

    • Certainty equivalent
    • Linear schedules
    • Moral hazard

    Fingerprint Dive into the research topics of 'Linear contracts as incentives: A puzzle'. Together they form a unique fingerprint.

  • Cite this