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Subjective Performance Measures in Optimal Incentive Contracts

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Author Info
Baker, George
Gibbons, Robert
Murphy, Kevin J

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Abstract

Incentive contracts often include important subjective components that mitigate incentive distortions caused by imperfect objective measures. This paper explores the combined use of subjective and objective performance measures in (respectively) implicit and explicit incentive contracts. The authors show that the presence of sufficiently effective explicit contracts can render all implicit contracts infeasible, even those that would otherwise yield the first-best. The authors also show, however, that in some circumstances objective and subjective measures are complements: neither an explicit nor an implicit contract alone yields positive profit but an appropriate combination of the two does. Finally, the authors consider subjective weights on objective measures. Copyright 1994, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Publisher Info
Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 109 (1994)
Issue (Month): 4 (November)
Pages: 1125-56
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Handle: RePEc:tpr:qjecon:v:109:y:1994:i:4:p:1125-56

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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.:
  1. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June. [Downloadable!] (restricted)
  2. Prendergast, Canice, 1993. "The Role of Promotion in Inducing Specific Human Capital Acquisition," The Quarterly Journal of Economics, MIT Press, vol. 108(2), pages 523-34, May. [Downloadable!] (restricted)
  3. Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-96, March. [Downloadable!] (restricted)
  4. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June. [Downloadable!] (restricted)
  5. Michael Waldman, 1984. "Job Assignments, Signalling, and Efficiency," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 255-267, Summer. [Downloadable!] (restricted)
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  6. Gibbons, Robert, 1987. "Piece-Rate Incentive Schemes," Journal of Labor Economics, University of Chicago Press, vol. 5(4), pages 413-29, October. [Downloadable!] (restricted)
  7. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August. [Downloadable!] (restricted)
  8. Kahn, Charles & Huberman, Gur, 1988. "Two-sided Uncertainty and "Up-or-Out" Contracts," Journal of Labor Economics, University of Chicago Press, vol. 6(4), pages 423-44, October. [Downloadable!] (restricted)
  9. Bull, Clive, 1987. "The Existence of Self-Enforcing Implicit Contracts," The Quarterly Journal of Economics, MIT Press, vol. 102(1), pages 147-59, February. [Downloadable!] (restricted)
  10. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-80, March. [Downloadable!] (restricted)
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  11. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring. [Downloadable!] (restricted)
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