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Distorted Performance Measures and Dynamic Incentives

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  • Oddvar M. Kaarbøe
  • Trond E. Olsen

Abstract

"Incentive contracts must typically be based on performance measures that do not exactly match the agents' true contribution to the principals' objectives. Such misalignment may pose difficulties for effective incentive design. We analyze the extent to which implicit dynamic incentives, such as career concerns and ratchet effects, alleviate or aggfravate these problems. Our analysis demonstrates that the interplay between distorted performance measures and implicit incentives implies that career and ratchet effects have real effects in that stronger ratchet effects or greater distortion may increase optimal monetary incentives, and that distortion affects the optimality of different promotion rules." Copyright 2008 Blackwell Publishing.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 17 (2008)
Issue (Month): 1 (03)
Pages: 149-183

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Handle: RePEc:bla:jemstr:v:17:y:2008:i:1:p:149-183

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Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/

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Web: http://www.blackwellpublishing.com/journal.asp?ref=1058-6407&site=1

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References

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  1. Meyer, Margaret A & Vickers, John, 1997. "Performance Comparisons and Dynamic Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 547-81, June.
  2. Mathias Dewatripont & Ian Jewitt & Jean Tirole, 1999. "The economics of career concerns: part 2 :application to missions and accountability of government agencies," ULB Institutional Repository 2013/9641, ULB -- Universite Libre de Bruxelles.
  3. Wendelin Schnedler, 2003. "On the Prudence of Rewarding A While Hoping for B," The Centre for Market and Public Organisation 03/067, Department of Economics, University of Bristol, UK.
  4. Meyer, M.A. & Olsen, T.E. & Torsvik, G., 1995. "Limited Intertemporal Commitment and Job Design," Economics Papers 102, Economics Group, Nuffield College, University of Oxford.
  5. Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 288-307, April.
  6. Bengt Holmstrom & Paul R. Milgrom, 1985. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Cowles Foundation Discussion Papers 742, Cowles Foundation for Research in Economics, Yale University.
  7. Gibbons, Robert, 1987. "Piece-Rate Incentive Schemes," Journal of Labor Economics, University of Chicago Press, vol. 5(4), pages 413-29, October.
  8. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
  9. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
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Cited by:
  1. Dietrichson, Jens, 2013. "Coordination Incentives, Performance Measurement and Resource Allocation in Public Sector Organizations," Working Papers 2013:26, Lund University, Department of Economics.

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