Renegotiation and Relative Performance Evaluation: Why an Informative Signal may be Useless

Yim, Andrew (2000): Renegotiation and Relative Performance Evaluation: Why an Informative Signal may be Useless. Published in: Review of Accounting Studies , Vol. 6, No. 1 (2001): pp. 77-108.

Abstract

Although Holmstrom’s informativeness criterion provides a theoretical foundation for the controllability principle and interfirm relative performance evaluation, empirical and field studies provide only weak evidence on such practices. This paper refines the traditional informativeness criterion by abandoning the conventional full-commitment assumption. With the possibility of renegotiation, a signal’s usefulness in incentive contracting depends on its information quality, not simply on whether the signal is informative. This paper derives conditions for determining when a signal is useless and when it is useful. In particular, these conditions will be met when the signal’s information quality is either sufficiently poor or sufficiently rich. (JEL C72, D82).

• Item Type: MPRA Paper
• Language: English
• Keywords: informativeness, monitoring, renegotiation, principal-agent model
• Subjects: M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M41 - Accounting; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M2 - Business Economics > M21 - Business Economics; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games

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