Dynamic Bonus Pools

41 Pages Posted: 31 Jul 2011 Last revised: 14 Dec 2011

See all articles by Jörg Budde

Jörg Budde

University of Bonn - Economic Science Area

Christian Hofmann

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Date Written: November 23, 2011

Abstract

We analyze a two-period agency problem with limited liability and non-verifiable information. The principal commits to a dynamic bonus pool comprising a fixed total payment that may be distributed over time to the agent and a third party. We find that the optimal two-period contract features memory. If the agent succeeds in the first-period, second-period incentives are weakened whereas higher-powered incentives are provided if he fails. The two-period bonus pool offers a complementary reason for why third-party payments are not commonly observed in practice.

Keywords: Bonus Pool, Incentives, Non-verifiable information

JEL Classification: D82, M40, M52

Suggested Citation

Budde, Jörg and Hofmann, Christian, Dynamic Bonus Pools (November 23, 2011). AAA 2012 Management Accounting Section (MAS) Meeting Paper, Available at SSRN: https://ssrn.com/abstract=1899204 or http://dx.doi.org/10.2139/ssrn.1899204

Jörg Budde

University of Bonn - Economic Science Area ( email )

Adenauerallee 24-42
D-53113 Bonn
Germany
+49-(0)228-73-9284 (Phone)
+49-(0)228-73-1785 (Fax)

Christian Hofmann (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

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