The optimal bonuses are expressed in terms of demand elasticities, service technology, and provider characteristics.
We also find that the optimal maximum bonus increases with volatility but decreases with the kurtosis parameter of the performance distribution.
The optimal contract and bonus are also derived explicitly if the insured is allowed to choose both of them.
For any pre-agreed bonus, the optimal insurance contract is given explicitly and shown to be either the full coverage contract when the insured pays high enough premium, or a deductible one otherwise.
If it was, wouldn't we expect that those who got tens of millions in annual bonuses would be optimal performers?
"We have shown that some form of bonus taxation in the financial sector is optimal above and beyond standard progressive income taxation," they conclude.
Therefore, participants were motivated to make optimal decisions, as that would maximize their chance of winning bonus money.
In this problem, the insured has to consider the so-called optimal action rather than the contracted compensation (or indemnity) due to the existence of the bonus.
In recent years, this interdisciplinary research has grown significantly covering research with regards to optimal compensation, investment decisions, tax avoidance and transfer pricing while analyzing the effects of corporate income taxes, wage taxes, bonus taxes and shareholder taxes.
We show how for any given Δ1,…,Δn, a simple second price bonus auction can be chosen which comes surprisingly close to giving the auctioneer the same surplus as an optimal mechanism.
