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Relative performance evaluation in organizations with information networks

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  • Xiangyu Shi

    (Yale University
    Chinese University of Hong Kong)

Abstract

I build on Bandiera et al. (Quarter. J. Econ. 120(3):917–962, 2005) and propose a novel mechanism whereby the structure of social network within an organization matters for its efficiency. The ability of each agent is private information, but adjacent agents in the network can observe each other’s ability. Under relative performance evaluation, the effect of adding links among agents on the effort level is ambiguous, and is determined by the second- (complementarity) and third-order (“risk” attitude) cross-partial derivatives of the compensation function. If the second- and third-order cross-partial derivatives of the compensation function satisfy certain conditions, any network structure can maximize the output given that compensation scheme.

Suggested Citation

  • Xiangyu Shi, 2023. "Relative performance evaluation in organizations with information networks," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 11(2), pages 243-254, October.
    • Handle: RePEc:spr:etbull:v:11:y:2023:i:2:d:10.1007_s40505-023-00256-4
    DOI: 10.1007/s40505-023-00256-4
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    References listed on IDEAS

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    1. Oriana Bandiera & Iwan Barankay & Imran Rasul, 2005. "Social Preferences and the Response to Incentives: Evidence from Personnel Data," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(3), pages 917-962.
    2. McAfee, R Preston & McMillan, John, 1991. "Optimal Contracts for Teams," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 561-577, August.
    3. Rajesh K. Aggarwal & Andrew A. Samwick, 1999. "Executive Compensation, Strategic Competition, and Relative Performance Evaluation: Theory and Evidence," Journal of Finance, American Finance Association, vol. 54(6), pages 1999-2043, December.
    4. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
    5. Shi, Xiangyu & Xi, Tianyang, 2018. "Race to safety: Political competition, neighborhood effects, and coal mine deaths in China," Journal of Development Economics, Elsevier, vol. 131(C), pages 79-95.
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    More about this item

    Keywords

    Relative performance evaluation; Principal-multiagent model; Information; Network;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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