On 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
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Providing Managerial Incentives: Cash Flows Versus Accrual Accounting
-
Accrual-Based Compensation, Depreciation and Investment Decisions
-
Controlling Investment Decisions: Depreciation- and Capital Charges
-
Revenue Recognition in a Multiperiod Agency Setting
By Sunil Dutta and Xiao-jun Zhang
-
Incentives for Efficient Inventory Management: The Role of Historical Cost
-
Leading Indicator Variables, Performance Measurement and Long-Term Versus Short-Term Contracts
-
Delegated Investment Decisions and Private Benefits of Control