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Relative Performance Evaluation, Agent Hold-Up and Firm Organization

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Author Info
Kvaløy, Ola () (Norwegian School of Hotel Management, Dept. of Business Administration, University of Stavanger)
Olsen, Trond E. () (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

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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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Publisher Info
Paper provided by Department of Finance and Management Science, Norwegian School of Economics and Business Administration in its series Discussion Papers with number 2007/26.

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Length: 23 pages
Date of creation: 30 Nov 2007
Date of revision:
Handle: RePEc:hhs:nhhfms:2007_026

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Postal: NHH, Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway
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Fax: +47 55 95 96 50
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Web page: http://www.nhh.no/for/
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Related research
Keywords: Relational contracts; multiagent moral hazard; endogenous hold-up;

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Find related papers by JEL classification:
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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References listed on IDEAS
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