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Relative performance evaluation in a multi-plant firm

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  • Annalisa Luporini

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Abstract

We analyze optimal compensation schedules for the directors of two plants belonging to the same owner and producing the same good but serving geographically differentiated markets. Since the outcome of each director depends on his own effort and on a random variable representing market conditions, the problem takes the form of a principal multi-agent model. We first provide appropriate extensions of the MLR and CDF conditions that ensure the validity of the first-order approach in the single agent case. Then, we show that affiliation of the random variables is a necessary and sufficient condition for the compensation of one director to negatively and monotonically depend on the performance of the other. Copyright Springer-Verlag Berlin/Heidelberg 2006

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 28 (2006)
Issue (Month): 1 (05)
Pages: 235-243

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Handle: RePEc:spr:joecth:v:28:y:2006:i:1:p:235-243

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Related research

Keywords: Principal-agent problems; Relative performance evaluation; First-order approach; Monotone likelihood ratio; Affiliation.;

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References

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  1. Mookherjee, Dilip, 1984. "Optimal Incentive Schemes with Many Agents," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 433-46, July.
  2. Robert Gibbons & Kevin Murphy, 1989. "Relative Performance Evaluation for Chief Executive Officers," Working Papers 628, Princeton University, Department of Economics, Industrial Relations Section..
  3. Itoh Hideshi, 1993. "Coalitions, Incentives, and Risk Sharing," Journal of Economic Theory, Elsevier, vol. 60(2), pages 410-427, August.
  4. Paul R. Milgrom, 1979. "Good Nevs and Bad News: Representation Theorems and Applications," Discussion Papers 407R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-67, November.
  6. Paul Milgrom & Robert J. Weber, 1981. "A Theory of Auctions and Competitive Bidding," Discussion Papers 447R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September.
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Cited by:
  1. Alessandro Cigno & Annalisa Luporini, 2006. "Optimal Policy Towards Families with DiĀ¤erent Amounts of Social Capital, in the Presence of Asymmetric Information and Stochastic Fertility," CHILD Working Papers wp03_06, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
  2. Liang, Wen-Jung & Tseng, Ching-Chih & Wang, Kuang-Cheng Andy, 2011. "Location choice with delegation: Bertrand vs. Cournot competition," Economic Modelling, Elsevier, vol. 28(4), pages 1774-1781, July.
  3. Fleckinger, Pierre, 2012. "Correlation and relative performance evaluation," Journal of Economic Theory, Elsevier, vol. 147(1), pages 93-117.
  4. Alessandro Cigno & Annalisa Luporini, 2011. "Optimal Family Policy in the Presence of Moral Hazard when the Quantity and Quality of Children are Stochastic," CESifo Economic Studies, CESifo, vol. 57(2), pages 349-364, June.

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