Yurday, Zeynep (2003): The Effects of Interim Performance Evaluations under Risk Aversion.
Download (314kB) | Preview
This paper reconsiders the applicability of a recently posed theoretical result concerning the optimality of not providing interim performance evaluations to the agent when implementing a given amount of total effort. The model used by Lizzeri, Meyers and Persico (2002) under the assumption of a risk neutral agent restricted by limited liability is analyzed when the agent is risk averse to show that interim performance evaluations do matter in reducing contract costs. In particular, they enable the principal to transfer the burden of insuring the agent against risk to the agent herself. Hence, the same incentives can be provided without as much consumption smoothing once performance information is revealed. On the other hand, when the incentive scheme is fixed, the risk averse agent may find it optimal to exert a greater amount of effort when performance evaluations are not revealed so as to insure herself against the possible losses that come with unexpected bad outcomes.
|Item Type:||MPRA Paper|
|Institution:||University of Rochester|
|Original Title:||The Effects of Interim Performance Evaluations under Risk Aversion|
|Keywords:||Performance Evaluation; Dynamic Contracts|
|Subjects:||D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search; Learning; Information and Knowledge; Communication; Belief
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D80 - General
|Depositing User:||Zeynep Yurday|
|Date Deposited:||30. Jan 2007|
|Last Modified:||17. Feb 2013 19:24|
 Grossman, Sanford and Oliver Hart. (1983). “An analysis of the principalagent problem”, Econometrica, 51, 7-45.  Laffont, Jean-Jacques and Martimort, David (2002). The Theory of Incentives-The Principal-Agent Model. Princeton and Oxford: Princeton University Press  Lizzeri, Alessandro, Meyer, Margaret A. and Persico, Nicola. (2002). “The Incentive Effects of Interim Performance Evaluations”, CARESS Working Paper #02-09.  Mirrlees, James. (1976). “The optimal structure of incentives and authority within an organization”, Bell Journal of Economics, 7.  Rogerson, William. (1985a). “The first-order approach to principal-agent problems”, Econometrica, 53, 1357-1367.  Rogerson, William. (1985b). “Repeated Moral Hazard”, Econometrica, 53, 69-76. 32.