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Designing Incentives under Multidimensional Performance Measures

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  • Surajeet Chakravarty
  • Miltiadis Makris

Abstract

We attempt to shed some light on the problem of providing incentives to service providers such as teachers and doctors. Often, outcomes of such services are not verifiable, and this has been cited as a reason for lack of incentive provision. We derive the contract offered by a principal if, in addition to moral hazard, the output of the agent may not be verified. We show that verified high attainment may not be rewarded. In this case, the bonus is increasing in the ability to verify output. We also show that an increase in potential nonverifiability may lead to efficiency gains and be beneficial for the principal.

Suggested Citation

  • Surajeet Chakravarty & Miltiadis Makris, 2012. "Designing Incentives under Multidimensional Performance Measures," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 168(4), pages 687-711, December.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201212)168:4_687:diumpm_2.0.tx_2-5
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    References listed on IDEAS

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    1. Luca Anderlini & Leonardo Felli, 1994. "Incomplete Written Contracts: Undescribable States of Nature," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 1085-1124.
    2. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
    3. Dixit, Avinash, 1997. "Power of Incentives in Private versus Public Organizations," American Economic Review, American Economic Association, vol. 87(2), pages 378-382, May.
    4. Thomas S. Dee & Benjamin J. Keys, 2004. "Does merit pay reward good teachers? Evidence from a randomized experiment," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 23(3), pages 471-488.
    5. Bull, Jesse & Watson, Joel, 2004. "Evidence disclosure and verifiability," Journal of Economic Theory, Elsevier, vol. 118(1), pages 1-31, September.
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    More about this item

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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