Statistics Papers

Document Type

Journal Article

Date of this Version

11-2010

Publication Source

The Quarterly Journal of Economics

Volume

125

Issue

4

Start Page

1435

Last Page

1458

DOI

10.1162/qjec.2010.125.4.1435

Abstract

Any compensation mechanism that is intended to reward superior investment performance can be gamed by managers who have no superior information or predictive ability; moreover they can capture a sizable amount of the fees intended for the superior managers. We derive precise bounds on the size of this coat‐tail effect and show that it remains substantial even when payments are postponed, bonuses are subject to clawback provisions, or outright penalties are imposed for poor performance. This impossibility result stands in contrast to performance measures, some of which are invulnerable to manipulation.

Copyright/Permission Statement

This is a post-peer-review, pre-copyedit version of an article published in The Quarterly Journal of Economics.

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Date Posted: 27 November 2017

This document has been peer reviewed.