Specific Knowledge and Performance Measurement
AbstractThis Paper examines optimal incentives and performance measurement in a setting where an agent has specific knowledge about the consequences of their actions for the principal. I study incentive contracts in which the agent’s compensation can be based on both ‘input’ measures closely related to the agent’s actions, and ‘output’ measures closely related to the principal’s pay-off. I argue that when the agent has specific knowledge (i.e. private information that is difficult to communicate) about how their actions contribute to the principal’s pay-off, output-based pay encourages the agent to use their knowledge while input-based pay does not. I show within a two-task agency model that (partially) output-based compensation is optimal even when the agent’s actions on each task can be measured perfectly. Comparative statics results show how the optimal choice of performance measures and incentives depends on the agent’s knowledge, environmental risk, technological uncertainty, and job complexity. The theory leads to several novel predictions, as well as new explanations for existing empirical findings.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4262.
Date of creation: Feb 2004
Date of revision:
Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
Other versions of this item:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
This paper has been announced in the following NEP Reports:
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.:
- Scott Keating, A., 1997. "Determinants of divisional performance evaluation practices," Journal of Accounting and Economics, Elsevier, vol. 24(3), pages 243-273, December.
- Avner Ben-Ner & Fanmin Kong & Stéphanie Lluis, 2011.
"Uncertainty, Task Environment, and Organization Design: An Empirical Investigation,"
1105, University of Waterloo, Department of Economics, revised Dec 2011.
- Ben-Ner, Avner & Kong, Fanmin & Lluis, Stéphanie, 2012. "Uncertainty, task environment, and organization design: An empirical investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 281-313.
- Antti Kauhanen & Sami Napari, 2012.
"Performance Measurement and Incentive Plans,"
Industrial Relations: A Journal of Economy and Society,
Wiley Blackwell, vol. 51(3), pages 645-669, 07.
- Jed Devaro & Fidan Ana Kurtulus, 2011. "An Empirical Analysis of Risk, Incentives and The Delegation of Worker Authority," UMASS Amherst Economics Working Papers 2011-13, University of Massachusetts Amherst, Department of Economics.
- Chen, Bo, 2012. "All-or-nothing payments," Journal of Mathematical Economics, Elsevier, vol. 48(3), pages 133-142.
- Jed DeVaro & Fidan Ana Kurtulus, 2010. "An An Empirical Analysis of Risk, Incentives and the Delegation of Worker Authority," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 63(4), pages 641-661, July.
- Anthony Marino & Jan Zabojnik, 2006.
"Work-Related Perks, Agency Problems, and Optimal Incentive Contracts,"
1107, Queen's University, Department of Economics.
- Anthony M. Marino & Ján Zábojník, 2008. "Work-related perks, agency problems, and optimal incentive contracts," RAND Journal of Economics, RAND Corporation, vol. 39(2), pages 565-585.
- Engert, Andreas & Goldlücke, Susanne, 2013. "Why agents need discretion: The business judgment rule as optimal standard of care," Working Papers 13-04, University of Mannheim, Department of Economics.
- Jan Bouwens & Laurence Van Lent, 2007.
"Assessing the Performance of Business Unit Managers,"
Journal of Accounting Research,
Wiley Blackwell, vol. 45(4), pages 667-697, 09.
- Bouwens, J.F.M.G. & Lent, L.A.G.M. van, 2007. "Assessing the performance of business unit managers," Open Access publications from Tilburg University urn:nbn:nl:ui:12-210600, Tilburg University.
- Bouwens, J.F.M.G. & Lent, L.A.G.M. van, 2006. "Assessing the Performance of Business Unit Managers," Discussion Paper 2006-92, Tilburg University, Center for Economic Research.
- Kato, Takao & Kauhanen, Antti & Salmi, Julia, 2013. "Empirical Evidence on the Dynamics of Incentive Plans," ETLA Working Papers 20, The Research Institute of the Finnish Economy.
- DeVaro, Jed & Prasad, Suraj, 2013. "The Relationship Between Delegation and Incentives Across Occupations: Evidence and Theory," Working Papers 2013-05, University of Sydney, School of Economics.
- Shi, Lan, 2011. "Respondable risk and incentives for CEOs: The role of information-collection and decision-making," Journal of Corporate Finance, Elsevier, vol. 17(1), pages 189-205, February.
- Wruck, Karen H. & Wu, YiLin, 2009. "Relationships, corporate governance, and performance: Evidence from private placements of common stock," Journal of Corporate Finance, Elsevier, vol. 15(1), pages 30-47, February.
- DeVaro, Jed, 2011. "Using "opposing responses" and relative performance to distinguish empirically among alternative models of promotions," MPRA Paper 35175, University Library of Munich, Germany.
- Ana-Maria Godeanu, 2012. "The antecedents of satisfaction with pay in teams: do performance-based compensation and autonomy keep team-members satisfied?," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 3, pages 145-168, June.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.