Distorted Performance Measures and Dynamic Incentives
AbstractIncentive contracts must typically be based on performance measures that do not exactly match agents' true contribution to principals' objectives. Such misalignment may impose difficulties for effective incentive design. We analyze to what extent implicit dynamic incentives such as career concerns and ratchet effects alleviate or aggravate these problems. Our analysis demonstrates that the interplay between distorted performance measures and implicit incentives implies that career and ratchet effects have real effects, that career and monetary incentives may be complements, and that stronger ratchet effects or more distortion may increase optimal monetary incentives.
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Bibliographic InfoPaper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2004/21.
Length: 20 pages
Date of creation: 29 Dec 2004
Date of revision:
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Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
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Incentive contracts; Performance measures;
Other versions of this item:
- Oddvar M. Kaarbøe & Trond E. Olsen, 2008. "Distorted Performance Measures and Dynamic Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(1), pages 149-183, 03.
- Kaarbøe, Oddvar M. & Olsen, Trond E., 2006. "Distorted Performance Measures and Dynamic Incentives," Working Papers in Economics 07/06, University of Bergen, Department of Economics.
- J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
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