Piecewise linear incentive scheme and participative budgeting |
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Authors: | Sungsoo Yeom Kashi R Balachandran Joshua Ronen |
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Institution: | (1) Kye Myong University, Korea;(2) Stern School of Business, 40 West Fourth St., Rm. 434, 10003 New York, NY, USA |
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Abstract: | This paper studies the economic incentives of participative budgeting through the design of incentive schemes within the agency
theory framework. In particular, a piecewise linear incentive scheme (PLIS), an optimal version of Weitzman's New Soviet Incentive
Scheme (NSIS), is derived.
The characteristics of PLIS are: first, unlike NSIS, the bonus (penalty) rates of the optimal PLIS vary according to the agent's
type in order to improve the principal's welfare, second, a penalty may be imposed on the overfulfillment of the agent's performance
in order to maintain incentive compatibility, and finally, it is shown that if the coefficients are constant as in NSIS, there
is no need for participative budgeting.
Also, PLIS is compared with a quadratic incentive scheme. Both incentive schemes achieve the optimal solution, but each incentive
scheme has its own advantage over the other depending on the situation. |
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Keywords: | |
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