Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1171: Delegation of Investment Decisions, and Optimal Renumeration of Agents

Assar Lindbeck and Jörgen Weibull ()
Additional contact information
Assar Lindbeck: Research Institute of Industrial Economics (IFN), Postal: and IIES, Stockholm University
Jörgen Weibull: Department of Economics, Postal: Stockholm School of Economics

Abstract: We analyze an investor who delegates information acquisition and investment decisions to an agent. The investor cannot monitor the agent’s effort or information. Optimal pay schemes contain bonuses that increase with the net return rate of the investment, but, unlike conventional contracts, at a decreasing rate. Moreover, investments with low return rates are penalized, again unlike conventional contracts. Nevertheless, it may be optimal for the investor to reward the agent above the agent’s reservation utility. We examine the role of the agent’s risk attitude for the shape of the pay scheme, and whether firing after bad investments is a more effective threat than reduced pay. We also analyze how the nature of the contract changes if the agent is given bargaining power.

Keywords: Delegation; Principal-agent; Principal-expert; Investment; Information aquisition; Rational inattention; Contract; Bonus; Penalty

JEL-codes: D01; D82; D86; G11; G23; G30

47 pages, First version: May 22, 2017. Revised: August 2, 2020.

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