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Performance Standards and Incentive Pay in Agency Contracts

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  • Katerina Sherstyuk

Abstract

When the presence of limited liability restricts a principal from imposing monetary fines on an agent in case of poor performance, the principal might use other kinds of punishment threats to deter the agent from shirking. We show that under the optimal contract in this case, the principal sets a performance standard and punishes the agent if the standard is not met, but rewards the agent on a profit‐sharing basis if the standard is significantly exceeded. The optimal choice of performance standards for such contracts is discussed. It is shown that punishment threats, although inefficient, often help the principal to discipline the agent. JEL classification: D82

Suggested Citation

  • Katerina Sherstyuk, 2000. "Performance Standards and Incentive Pay in Agency Contracts," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(4), pages 725-736, December.
    • Handle: RePEc:bla:scandj:v:102:y:2000:i:4:p:725-736
    DOI: 10.1111/1467-9442.00223
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    Cited by:

    1. Goldsmith, Peter D. & Turan, Nesve A. & Gow, Hamish R., 2004. "Firms, Incentives, And The Supply Of Food Safety: A Formal Model Of Government Enforcement," 2004 Annual meeting, August 1-4, Denver, CO 20343, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. Helmut Bester & Johannes Münster, 2016. "Subjective evaluation versus public information," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(4), pages 723-753, April.
    3. Robert Dur & Ola Kvaløy & Anja Schöttner, 2022. "Leadership Styles and Labor Market Conditions," Management Science, INFORMS, vol. 68(4), pages 3150-3168, April.
    4. Dela Cruz, Alma M., 2007. "Contractual Arrangements in Agriculture (Northern and Central Luzon Component)," Discussion Papers DP 2007-21, Philippine Institute for Development Studies.
    5. Ramón Hermoso & Henrique Lopes Cardoso & Maria Fasli, 2015. "From roles to standards: a dynamic maintenance approach using incentives," Information Systems Frontiers, Springer, vol. 17(4), pages 763-778, August.
    6. Eric S. Chou & Chien-Lung Chen, 2015. "Can Agents Be Better Off with Pay Caps?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 117(4), pages 1069-1090, October.
    7. Alma M. dela Cruz, 2007. "Contractual Arrangements in Agriculture (Northern and Central Luzon Component)," Development Economics Working Papers 22626, East Asian Bureau of Economic Research.
    8. Wolitzky Alexander, 2012. "Career Concerns and Performance Reporting in Optimal Incentive Contracts," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 12(1), pages 1-32, February.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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