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Relative performance evaluation, agent hold-up and firm organization

In: Organizational Innovation and Firm Performance

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  • Ola Kvaløy
  • Trond E. Olsen

Abstract

We analyze a situation where common noise makes compensation based on relative performance evaluation (RPE) desirable, but where the agents' ability to hold-up values ex post obstruct the implementation of optimal RPE schemes. The principal can take actions to constrain the agents' hold-up power by limiting their outside options and by protecting property rights, but once these actions are costly, a trade-off between incentive provision and agent control appears. The model contributes to the theory of the firm. It indicates why firms, not agents, own assets, and why peer-dependent incentive systems are more common within than between firms.

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This chapter was published in:

  • George Baker & Takeo Hoshi & Hideshi Itoh & Sadao Nagaoka, 2008. "Organizational Innovation and Firm Performance," NBER Books, National Bureau of Economic Research, Inc, number bake08-1, July.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12175.

    Handle: RePEc:nbr:nberch:12175

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    Cited by:
    1. Ola Kvaløy & Trond E. Olsen, 2008. "Cooperation in Knowledge-Intensive Firms," Journal of Human Capital, University of Chicago Press, vol. 2(4), pages 410-440.

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