Weitzman scheme

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The Weitzman Scheme , also known as the Soviet Incentive Scheme , is an incentive scheme designed to ensure that managers report truthfully to company management . The scheme is based on a contribution by Martin Weitzman from 1976.

The initial consideration is that the manager knows exactly about the future company situation and thus about the achievable surpluses, whereas the company management does not. The Weitzman scheme aims at the remuneration of the manager, which is linked to the size to be reported . ${\displaystyle x^{*}}$

description

Assumptions are:

• The manager always receives a bonus for the size he reports. ${\displaystyle {\mathit {a^{*}\cdot x^{*}}}}$
• The manager receives a bonus of in case of generating a surplus on the report. ${\displaystyle {\mathit {a_{1}\cdot (x-x^{*}}})}$
• The manager receives a premium deduction of if he does not reach the reported size. ${\displaystyle {\mathit {a_{2}\cdot (x^{*}-x}})}$
  • The sentences a are always greater than zero and . ${\displaystyle a_{1}<a^{*}<a_{2}}$

It is therefore optimal for the manager to state the true value that is assumed to be known to him. If he said a lower value, he would receive a bonus, but it would be less than the bonus he would get if he told the truth.

The scheme can lead to false incentives when funding is tight to invest and the expected returns are unevenly distributed over the amounts of investment required. Example:

• Manager A expects a high return RA1 with a small investment sum, but for higher investment amounts the return is lower RA2
• Manager B has an approximately even return expectation RB, which is below the high return RA1 but higher than RA2.

It can now be rational for manager A to modify the information on the returns in such a way that he reports a more even return, i.e. lowering return RA1, but increasing return RA2 in order to always be above RB. If B continues to report truthfully, he will now receive higher financial resources and thus increase his premium. For the head office, the report will appear to be truthful even after the investment period has expired, since the total return of RA1 and RA2 corresponds to the average reported by A.

See also

• Groves scheme

literature

• Ralf Ewert, Alfred Wagenhofer : Internal company accounting , Springer, Berlin 2005, ISBN 3-540-23617-1
• ML Weitzman: The New Soviet Incentive Model , in Bell Journal of Economics 1976, pp. 251-257
• W. Ossadnik: Controlling , Oldenbourg, Munich / Vienna, 4th edition 2009, ISBN 978-3-486-58621-3 , pp. 446–454

Web links

• The Weitzman scheme

Footnotes

1. ↑ Martin Lawrence Weitzman, The New Soviet Incentive Mode in Bell Journal of Economics , 1976, pp. 251-257
2. ^ Ralf Ewert, Alfred Wagenhofer: Internal company accounting , Berlin 2005, p. 423