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Relative Performance Evaluation in a Multi-Plant Firm

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  • Annalisa Luporini

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.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1420.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1420

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Keywords: principal-agent problems; relative performance evaluation; first-order approach; monotone likelihood ratio; affiliation;

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  1. Robert Gibbons & Kevin J. Murphy, 1991. "Relative Performance Evaluation for Chief Executive Officers," NBER Working Papers 2944, National Bureau of Economic Research, Inc.
  2. Mookherjee, Dilip, 1984. "Optimal Incentive Schemes with Many Agents," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(3), pages 433-46, July.
  3. Paul Milgrom & Robert J. Weber, 1981. "A Theory of Auctions and Competitive Bidding," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 447R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, Econometric Society, vol. 56(5), pages 1177-90, September.
  5. Paul R. Milgrom, 1979. "Good Nevs and Bad News: Representation Theorems and Applications," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 407R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, Econometric Society, vol. 53(6), pages 1357-67, November.
  7. Itoh Hideshi, 1993. "Coalitions, Incentives, and Risk Sharing," Journal of Economic Theory, Elsevier, Elsevier, vol. 60(2), pages 410-427, August.
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Cited by:
  1. Alessandro Cigno & Annalisa Luporini, 2009. "Optimal family policy in the presence of moral hazard, when the quantity and quality of children are stochastic," CHILD Working Papers, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY wp13_09, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
  2. Alessandro Cigno & Annalisa Luporini, 2006. "Optimal Policy Towards Families with Di¤erent Amounts of Social Capital, in the Presence of Asymmetric Information and Stochastic Fertility," CHILD Working Papers, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY wp03_06, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
  3. Fleckinger, Pierre, 2012. "Correlation and relative performance evaluation," Journal of Economic Theory, Elsevier, Elsevier, vol. 147(1), pages 93-117.
  4. Liang, Wen-Jung & Tseng, Ching-Chih & Wang, Kuang-Cheng Andy, 2011. "Location choice with delegation: Bertrand vs. Cournot competition," Economic Modelling, Elsevier, Elsevier, vol. 28(4), pages 1774-1781, July.
  5. Tong Wang & Seong Cheol Park, 2014. "Livestock Disease Indemnity Design under Common Uncertainty: A Multi-agent Problem," Economics Bulletin, AccessEcon, vol. 34(3), pages 1396-1409.

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