Advanced Search
MyIDEAS: Login to save this article or follow this journal

Multi-task incentive contract and performance measurement with multidimensional types

Contents:

Author Info

  • Meng, Dawen
  • Tian, Guoqiang

Abstract

This paper provides a new explanation for the dominance of the low-powered incentive contract over the high-powered incentive contract using a hybrid model of moral hazard and adverse selection. We first show that unobservable risk aversion or cost leads to low-powered incentives. We then consider the case where both risk aversion and cost of the agent are unobservable to the principal. This multidimensional mechanism design problem is solved under two assumptions with regard to the structures of performance measurement system and wage contract. It is shown that if the deterministic and stochastic components of performance measures vary proportionally, the principal is inclined to provide a low-powered incentive contract. Moreover, it is shown that if the base wage depends on a quadratic function rather than the direction of the performance wage vector, no incentive is provided for most of the performance measures in an orthogonal performance measurement system.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/pii/S0899825612001601
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

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

Volume (Year): 77 (2013)
Issue (Month): 1 ()
Pages: 377-404

as in new window
Handle: RePEc:eee:gamebe:v:77:y:2013:i:1:p:377-404

Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/622836

Related research

Keywords: Multi-task incentive model; Multidimensional mechanism design; Low-powered incentive; Missing incentive;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-41, June.
  2. Rochet, Jean-Charles, 1987. "A necessary and sufficient condition for rationalizability in a quasi-linear context," Journal of Mathematical Economics, Elsevier, vol. 16(2), pages 191-200, April.
  3. Caillaud, B & Guesnerie, Roger & Rey, P, 1992. "Noisy Observation in Adverse Selection Models," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 595-615, July.
  4. Guoqiang Tian, 2006. "The unique informational efficiency of the competitive mechanism in economies with production," Social Choice and Welfare, Springer, vol. 26(1), pages 155-182, January.
  5. Walker, Mark, 1977. "On the informational size of message spaces," Journal of Economic Theory, Elsevier, vol. 15(2), pages 366-375, August.
  6. Suren Basov & Peter Bardsley, 2005. "A General Model of Coexisting Hidden Action and Hidden Information," Department of Economics - Working Papers Series 958, The University of Melbourne.
  7. Basov, Suren, 2001. "Hamiltonian approach to multi-dimensional screening," Journal of Mathematical Economics, Elsevier, vol. 36(1), pages 77-94, September.
  8. Picard, Pierre, 1987. "On the design of incentive schemes under moral hazard and adverse selection," Journal of Public Economics, Elsevier, vol. 33(3), pages 305-331, August.
  9. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
  10. Baiman, Stanley, 1990. "Agency research in managerial accounting: A second look," Accounting, Organizations and Society, Elsevier, vol. 15(4), pages 341-371.
  11. Green, Jerry R & Stokey, Nancy L, 1983. "A Comparison of Tournaments and Contracts," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 349-64, June.
  12. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
  13. Osana, Hiroaki, 1978. "On the informational size of message spaces for resource allocation processes," Journal of Economic Theory, Elsevier, vol. 17(1), pages 66-78, February.
  14. Mount, Kenneth & Reiter, Stanley, 1974. "The informational size of message spaces," Journal of Economic Theory, Elsevier, vol. 8(2), pages 161-192, June.
  15. Rochet, J. C., 1985. "The taxation principle and multi-time Hamilton-Jacobi equations," Journal of Mathematical Economics, Elsevier, vol. 14(2), pages 113-128, April.
  16. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
  17. Tian, Guoqiang, 1994. "On informational efficiency and incentive aspects of generalized ratio equilibria," Journal of Mathematical Economics, Elsevier, vol. 23(4), pages 323-337, July.
  18. Hammond, Peter J, 1979. "Straightforward Individual Incentive Compatibility in Large Economies," Review of Economic Studies, Wiley Blackwell, vol. 46(2), pages 263-82, April.
  19. George Baker, 2002. "Distortion and Risk in Optimal Incentive Contracts," Journal of Human Resources, University of Wisconsin Press, vol. 37(4), pages 728-751.
  20. Guesnerie Roger & Picard Pierre & Rey P, 1986. "Adverse selection and moral hazard with risk-neutral agent," CEPREMAP Working Papers (Couverture Orange) 8624, CEPREMAP.
  21. Barry J. Nalebuff & Joseph E. Stiglitz, 1983. "Prices and Incentives: Towards a General Theory of Compensation and Competition," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 21-43, Spring.
  22. Melumad, Nahum D. & Reichelstein, Stefan, 1989. "Value of communication in agencies," Journal of Economic Theory, Elsevier, vol. 47(2), pages 334-368, April.
  23. Thiele, Veikko, 2010. "Task-specific abilities in multi-task principal-agent relationships," Labour Economics, Elsevier, vol. 17(4), pages 690-698, August.
  24. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
  25. Suren Basov & Svetlana Danilkina, 2010. "Multitasking, Multidimensional Screening, and Moral Hazard with Risk Neutral Agents," The Economic Record, The Economic Society of Australia, vol. 86(s1), pages 80-86, 09.
  26. Guoqiang Tian, 2004. "A Unique Informationally Efficient Allocation Mechanism In Economies With Consumption Externalities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(1), pages 79-111, 02.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:gamebe:v:77:y:2013:i:1:p:377-404. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.