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Aligning Ambition and Incentives

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Abstract

In many economic situations several principals contract with the same agents sequentially. Asymmetric learning about agents’ abilities provides the first principal with an informational advantage and has profound implications for the design of incentive contracts. We show that the principal always strategically distorts information revelation to future principals about the ability of her agents. The second main result is that she can limit her search for optimal incentive schemes to the class of relative performance contracts that cannot be replicated by contracts based on individual performance only. This provides a new rationale for the optimality of such compensation schemes.

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Paper provided by Department of Economics, Royal Holloway University of London in its series Royal Holloway, University of London: Discussion Papers in Economics with number 05/03.

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Length: 38 pages
Date of creation: Mar 2005
Date of revision: Mar 2005
Handle: RePEc:hol:holodi:0503

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Keywords: relative performance contracts; reputation; asymmetric learning.;

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Cited by:
  1. Alexander K. Koch & Eloic Peyrache, 2005. "Aligning Ambition and Incentives," Royal Holloway, University of London: Discussion Papers in Economics 05/03, Department of Economics, Royal Holloway University of London, revised Mar 2005.
  2. Imhof, Lorens & Kräkel, Matthias, 2013. "Bonus Pools and the Informativeness Principle," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 413, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  3. Julia Nafziger & Heiner Schumacher, 2013. "Information Management and Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(1), pages 140-163, 03.
  4. Stephen Eliot Hansen, 2010. "The Benefits of Limited Feedback in Organizations," Working Papers 490, Barcelona Graduate School of Economics.

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