Contracting with discretionary bonuses
Theoretical Economics
2025-12-01 v1 Optimization and Control
Abstract
We study a continuous time contracting model in which a principal hires a risk averse agent to manage a project over a finite horizon and provides sequential payments whose timing is endogenously determined. The resulting nonzero-sum interaction between the principal and the agent is reformulated as a mixed control and stopping problem. Using numerical simulations, we investigate how factors such as the relative impatience of the parties and the number of bonus payments influence the principal's value and the structure of the optimal bonus payment scheme. A notable finding is that, in some contractual environments, the principal optimally offers a sign-on bonus to front-load incentives.
Keywords
Cite
@article{arxiv.2511.23424,
title = {Contracting with discretionary bonuses},
author = {Guillermo Alonso Alvarez and Ibrahim Ekren and Liwei Huang},
journal= {arXiv preprint arXiv:2511.23424},
year = {2025}
}