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On the Prudence of Rewarding A While Hoping for B

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  • Wendelin Schnedler

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Abstract

In multiple-task hidden-action models, the (mis-)allocation of effort may play an important role for benefit creation. Signals which capture this benefit and which are used in incentive schemes should thus not only be judged by the noise and the associated costs but also by the mis-allocation which they induce. How can mis-allocation be measured? This article presents two requirements for such a measure (invariance and monotonicity) and analyses whether they are met by proposed measures of mis-allocation. All examined measures assert that an unbiased signal for benefit leads to the lowest mis-allocation. Here, the signal leading to the lowest mis-allocation is computed and shown to be unbiased for the benefit only under restrictive assumptions on the cost function (equal marginal costs for different tasks). Generally, using an unbiased signal does not imply the lowest mis-allocation.

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File URL: http://www.bris.ac.uk/Depts/CMPO/workingpapers/wp67.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Bristol, UK in its series The Centre for Market and Public Organisation with number 03/067.

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Length: 24 pages
Date of creation: Apr 2003
Date of revision:
Handle: RePEc:bri:cmpowp:03/067

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Keywords: multitasking; LEN-model; hidden-action; moral hazard;

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  1. Macho-Stadler, Ines & Perez-Castrillo, J. David, 2001. "An Introduction to the Economics of Information: Incentives and Contracts," OUP Catalogue, Oxford University Press, edition 2, number 9780199243273.
  2. Chaim Fershtman & Kenneth L Judd, 1984. "Equilibrium Incentives in Oligopoly," Discussion Papers 642, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March.
  4. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
  5. George Baker, 2000. "The Use of Performance Measures in Incentive Contracting," American Economic Review, American Economic Association, vol. 90(2), pages 415-420, May.
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Cited by:
  1. Kaarbøe, Oddvar M. & Olsen, Trond E., 2004. "Distorted Performance Measures and Dynamic Incentives," Discussion Papers 2004/21, Department of Business and Management Science, Norwegian School of Economics.
  2. Thiele, Veikko, 2007. "Task-Specific Abilities in Multi-Task Agency Relations," MPRA Paper 2470, University Library of Munich, Germany.

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