Thiele, Veikko (2007): Subjective Performance Evaluation and Collusion.
Download (181kB) | Preview
This paper considers a principal-agent relationship and explores the incentive provision when the agent's performance cannot be verified. It contrasts two alternatives for the principal to provide incentives: (i) to subjectively evaluate the agent's performance; and (ii), to delegate this task to a supervisor. Supervision induces contractible information about the agent's performance, but could result in vertical collusion. This paper demonstrates that collusion-proofness can require an inefficiently high payment to the supervisor, and too low powered incentives for the agent. The eventuality of collusion is further found to potentially (i), improve the profitability; and (ii), facilitate the achievement of relational contracts based upon subjective performance evaluations.
|Item Type:||MPRA Paper|
|Institution:||University of British Columbia - Sauder School of Business|
|Original Title:||Subjective Performance Evaluation and Collusion|
|Keywords:||Subjective performance measurement; collusion; relational contracts; limited liability; incentives|
|Subjects:||D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information; Mechanism Design
|Depositing User:||Veikko Thiele|
|Date Deposited:||01. Apr 2007|
|Last Modified:||24. Feb 2013 23:33|
Baker, G., R. Gibbons, and K. J. Murphy (1994). Subjective performance measures in optimal incentive contracts. Quarterly Journal of Economics 109(4), 1125–1156.
Bull, C. (1987). The existence of self-enforcing implicit contracts. Quarterly Journal of Economics 102(1), 147–160.
Demougin, D. and O. Fabel (2004). The determinants of salary and bonus for rank and file employees. University of Konstanz EconomicsWorking Paper No. 327.
Faure-Grimaud, A., J.-J. Laffont, and D. Martimort (2003). Collusion, delegation and supervision with soft information. Review of Economic Studies 70(2), 253–279.
Gibbons, R. (2005). Incentives between firms (and within). Management Science 51(1), 2–17.
Gibbs, M. (1995). Incentive compensation in a corporate hierarchy. Journal of Accounting and Economics 19, 247–277.
Gibbs, M., K. A. Merchant, W. A. Van der Stede, and M. E. Vargus (2004). Determinants and effects of subjectivity in incentives. Accounting Review 79(2), 409–436.
Holmström, B. (1979). Moral hazard and observability. Bell Journal of Economics 10(1), 74–91.
Kessler, A. S. (2000). On monitoring and collusion in hierarchies. Journal of Economic Theory 91, 280–291.
Kofman, F. and J. Lawarree (1993). Collusion in hierarchical agency. Econometrica 61(3), 629–656.
Levin, J. (2003). Relational incentive contracts. American Economic Review 93(3), 835–857.
MacLeod, W. B. (2003). Optimal contracting with subjective evaluation. American Economic Review 93(1), 216–240.
MacLeod, W. B. and J. M. Malcomson (1989). Implicit contracts, incentive compatibility, and involuntary unemployment. Econometrica 57(2), 447–480.
Pearce, D. G. and E. Stacchetti (1998). The interaction of implicit and explicit contracts in repeated agency. Games and Economic Behavior 23, 75–96.
Strausz, R. (1997). Collusion and renegotiation in a principal-supervisor-agent relationship. Scandinavian Journal of Economics 99(4), 497–518.
Tirole, J. (1986). Hierarchies and bureaucracies: On the role of collusion in organizations. Journal of Law, Economics, & Organization 2(2), 181–214.
Villadsen, B. (1995). Communication and delegation in collusive agencies. Journal of Accounting and Economics 19, 315–344.
Available Versions of this Item
- Subjective Performance Evaluation and Collusion. (deposited 01. Apr 2007) [Currently Displayed]