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Specific knowledge and performance measurement

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  • Michael Raith

Abstract

I examine optimal incentives and performance measurement in a model where an agent has specific knowledge (in the sense of Jensen and Meckling) about the consequences of his actions for the principal. Contracts can be based both on input measures related to the agent's actions and an output measure related to the principal's payoff. Whereas input-based pay minimizes income risk, only output-based pay encourages the agent to use his knowledge efficiently. In general, it is optimal to use both kinds of performance measures. The results help to explain some empirical puzzles and lead to several new predictions. Copyright (c) 2008, RAND.

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Bibliographic Info

Article provided by RAND Corporation in its journal The RAND Journal of Economics.

Volume (Year): 39 (2008)
Issue (Month): 4 ()
Pages: 1059-1079

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Handle: RePEc:bla:randje:v:39:y:2008:i:4:p:1059-1079

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  1. Scott Keating, A., 1997. "Determinants of divisional performance evaluation practices," Journal of Accounting and Economics, Elsevier, vol. 24(3), pages 243-273, December.
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Cited by:
  1. Antti Kauhanen & Sami Napari, 2012. "Performance Measurement and Incentive Plans," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 51(3), pages 645-669, 07.
  2. Anthony M. Marino & Ján Zábojník, 2008. "Work-related perks, agency problems, and optimal incentive contracts," RAND Journal of Economics, RAND Corporation, vol. 39(2), pages 565-585.
  3. Wruck, Karen H. & Wu, YiLin, 2009. "Relationships, corporate governance, and performance: Evidence from private placements of common stock," Journal of Corporate Finance, Elsevier, vol. 15(1), pages 30-47, February.
  4. Bouwens, J.F.M.G. & Lent, L.A.G.M. van, 2007. "Assessing the performance of business unit managers," Open Access publications from Tilburg University urn:nbn:nl:ui:12-210600, Tilburg University.
  5. Shi, Lan, 2011. "Respondable risk and incentives for CEOs: The role of information-collection and decision-making," Journal of Corporate Finance, Elsevier, vol. 17(1), pages 189-205, February.
  6. Ben-Ner, Avner & Kong, Fanmin & Lluis, Stéphanie, 2012. "Uncertainty, task environment, and organization design: An empirical investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 281-313.
  7. Engert, Andreas & Goldlücke, Susanne, 2013. "Why agents need discretion: The business judgment rule as optimal standard of care," Working Papers 13-04, University of Mannheim, Department of Economics.
  8. DeVaro, Jed, 2011. "Using "opposing responses" and relative performance to distinguish empirically among alternative models of promotions," MPRA Paper 35175, University Library of Munich, Germany.
  9. Kato, Takao & Kauhanen, Antti & Salmi, Julia, 2013. "Empirical Evidence on the Dynamics of Incentive Plans," ETLA Working Papers 20, The Research Institute of the Finnish Economy.
  10. Chen, Bo, 2012. "All-or-nothing payments," Journal of Mathematical Economics, Elsevier, vol. 48(3), pages 133-142.
  11. Ana-Maria Godeanu, 2012. "The antecedents of satisfaction with pay in teams: do performance-based compensation and autonomy keep team-members satisfied?," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 3, pages 145-168, June.
  12. DeVaro, Jed & Prasad, Suraj, 2013. "The Relationship Between Delegation and Incentives Across Occupations: Evidence and Theory," Working Papers 2013-05, University of Sydney, School of Economics.
  13. Jed Devaro & Fidan Ana Kurtulus, 2011. "An Empirical Analysis of Risk, Incentives and The Delegation of Worker Authority," UMASS Amherst Economics Working Papers 2011-13, University of Massachusetts Amherst, Department of Economics.

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