Working Paper No. 1171

Delegation of Investment Decisions, and Optimal Renumeration of Agents

Published: May 22, 2017, revised November 2017 and August 2020Pages: 47Keywords: Delegation; Principal-agent; Principal-expert; Investment; Information aquisition; Rational inattention; Contract; Bonus; PenaltyJEL-codes: D01; D82; D86; G11; G23; G30
Published version

Delegation of Investment Decisions, and Optimal Renumeration of Agents Assar Lindbeck and Jörgen Weibull

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.

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