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Delegation of investment decisions, and optimal remuneration of agents

Assar Lindbeck and Jörgen Weibull

European Economic Review, 2020, vol. 129, issue C

Abstract: We analyze an investor who delegates information acquisition and investment decisions to an agent. The investor cannot monitor the agent’s effort or information. Optimal pay schemes contain bonuses that increase with the net return rate of the investment, but, unlike conventional contracts, at a decreasing rate. Moreover, investments with low return rates are penalized, again unlike conventional contracts. Nevertheless, it may be optimal for the investor to reward the agent above the agent’s reservation utility. We examine the role of the agent’s risk attitude for the shape of the pay scheme, and whether firing after bad investments is a more effective threat than reduced pay. We also analyze how the nature of the contract changes if the agent is given bargaining power.

Keywords: Delegation; Principal-agent; Principal-expert; Investment; Information acquisition; Rational inattention; Contract; Bonus; Penalty; Lambert W function (search for similar items in EconPapers)
JEL-codes: D01 D82 D86 G11 G23 G30 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Delegation of Investment Decisions, and Optimal Renumeration of Agents (2020) Downloads
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DOI: 10.1016/j.euroecorev.2020.103559

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