Download This PaperOn the Optimality of Linear Contracts to Induce Goal-Congruent Investment Behavior
10 Pages Posted: 15 Apr 2010
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: Suggested Citation
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