On the Optimality of Linear Contracts to Induce Goal-Congruent Investment Behavior

10 Pages Posted: 15 Apr 2010

See all articles by Louis Velthuis

Louis Velthuis

Goethe University Frankfurt

Thomas Pfeiffer

University of Vienna - Accounting and Control

Date Written: July 1, 2004

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.

Keywords: Residual Income, Linear Contracts, Goal-Congruence

JEL Classification: M40

Suggested Citation

Velthuis, Louis J. and Pfeiffer, Thomas, On the Optimality of Linear Contracts to Induce Goal-Congruent Investment Behavior (July 1, 2004). Available at SSRN: https://ssrn.com/abstract=1027075 or http://dx.doi.org/10.2139/ssrn.1027075

Louis J. Velthuis

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Thomas Pfeiffer (Contact Author)

University of Vienna - Accounting and Control ( email )

Oskar-Morgenstern-Platz 1
Vienna 1090, Vienna
Austria
+43-1-4277-38002 (Phone)
+43-1-4277-38004 (Fax)

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