On the optimality of linear contracts to induce goal-congruent investment behaviour

Thomas Pfeiffer and Louis Velthuis

Applied Economics Letters, 2005, vol. 12, issue 4, 207-211

Abstract: It has become increasingly popular in practice to implement incentive systems that create goal-congruent investment behaviour between central and divisional management. In the following paper, it is shown that only linear contracts enable goal-congruent investment decisions if central management does not have information about the investment project. This might cast a new light on why linear compensation schemes are often used in practice.

Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:taf:apeclt:v:12:y:2005:i:4:p:207-211

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DOI: 10.1080/1350485042000329095

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