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Aligning Ambition and Incentives

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  • Koch, Alexander K.

    ()
    (Aarhus University)

  • Peyrache, Eloic

    ()
    (HEC Paris)

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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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1527.

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Length: 39 pages
Date of creation: Mar 2005
Date of revision:
Handle: RePEc:iza:izadps:dp1527

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Keywords: reputation; asymmetric learning; relative performance contracts;

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References

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Cited by:
  1. Stephen Eliot Hansen, 2010. "The Benefits of Limited Feedback in Organizations," Working Papers 490, Barcelona Graduate School of Economics.
  2. Julia Nafziger & Heiner Schumacher, 2013. "Information Management and Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(1), pages 140-163, 03.
  3. Koch, Alexander K. & Peyrache, Eloic, 2005. "Aligning Ambition and Incentives," IZA Discussion Papers 1527, Institute for the Study of Labor (IZA).
  4. Imhof, Lorens & Kräkel, Matthias, 2014. "Bonus pools and the informativeness principle," European Economic Review, Elsevier, vol. 66(C), pages 180-191.

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