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Discretionary rewards as a feedback mechanism

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Author Info

  • Suvorov, Anton
  • van de Ven, Jeroen

Abstract

This paper studies the use of discretionary rewards in a finitely repeated principal-agent relationship with moral hazard. The key aspect is that rewards have informational content. When the principal obtains a private subjective signal about the agent's performance, she may pay discretionary bonuses to provide credible feedback to the agent. In accordance with the often observed compression of ratings, we show that in equilibrium the principal communicates the agent's interim performance imperfectly, i.e., she does not fully differentiate good and bad performance. Furthermore, we show that small rewards can have a large impact on the agent's effort, provided that the principal's stake in the project is small.

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Bibliographic Info

Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 67 (2009)
Issue (Month): 2 (November)
Pages: 665-681

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Handle: RePEc:eee:gamebe:v:67:y:2009:i:2:p:665-681

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Web page: http://www.elsevier.com/locate/inca/622836

Related research

Keywords: Discretionary rewards Feedback Self confidence Subjective performance Moral hazard;

References

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Citations

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Cited by:
  1. Silvia Dominguez Martinez & Randolph Sloof & Ferdinand von Siemens, 2010. "Monitoring your Friends, not your Foes: Strategic Ignorance and the Delegation of Real Authority," Tinbergen Institute Discussion Papers 10-101/1, Tinbergen Institute.
  2. Ferdinand von Siemens, 2011. "Intention-Based Reciprocity and the Hidden Costs of Control," Tinbergen Institute Discussion Papers 11-115/1, Tinbergen Institute.
  3. Fuchs, William, 2013. "Subjective Evaluations: Discretionary Bonuses and Feedback Credibility," IZA Discussion Papers 7758, Institute for the Study of Labor (IZA).
  4. Jan Zabojnik, 2011. "Subjective Evaluations with Performance Feedback," Working Papers 1283, Queen's University, Department of Economics.
  5. Andrei Bremzeny & Elena Khokhlovaz & Anton Suvorov & Jeroen van de Ven, 2011. "Bad News: An Experimental Study on the Informational Effects of Rewards," Working Papers w0164, Center for Economic and Financial Research (CEFIR).
  6. Terstiege, Stefan, 2013. "Objective versus Subjective Performance Evaluations," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 430, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  7. Ferdinand von Siemens, 2011. "Intention-Based Reciprocity and the Hidden Costs of Control," Tinbergen Institute Discussion Papers 11-115/1, Tinbergen Institute.
  8. von Siemens, Ferdinand A., 2013. "Intention-based reciprocity and the hidden costs of control," Journal of Economic Behavior & Organization, Elsevier, vol. 92(C), pages 55-65.
  9. Ferdinand von Siemens, 2011. "Intention-Based Reciprocity and the Hidden Costs of Control," CESifo Working Paper Series 3553, CESifo Group Munich.

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