Bonus Pools, Limited Liability, and Tournaments

Jörg Budde

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

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.

Keywords: bonus pools; relative performance evaluation; subjective performance evaluation; tournaments; verifiability (search for similar items in EconPapers)
JEL-codes: D82 M52 M54 (search for similar items in EconPapers)
Date: 2007-03
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Citations: View citations in EconPapers (5)

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