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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. 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).
  2. Ferdinand von Siemens, 2011. "Intention-Based Reciprocity and the Hidden Costs of Control," Tinbergen Institute Discussion Papers 11-115/1, Tinbergen Institute.
  3. Jan Zabojnik, 2011. "Subjective Evaluations with Performance Feedback," Working Papers 1283, Queen's University, Department of Economics.
  4. 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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