When an agent overstates his/her true performance, a rational market can simply discount the reported performance, and correctly guess the true performance. This paper shows, however, that such rational market discounting leads to less productive effort by the agent and less performance-pay by the principal. Therefore, a rational market and a profit-maximizing principal can exacerbate the lack of productive effort by the agent.
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Paper provided by University at Albany, SUNY, Department of Economics in its series Discussion Papers with number
08-07.
Length: Date of creation: 2008 Date of revision: Handle: RePEc:nya:albaec:08-07
Contact details of provider: Postal: Department of Economics, BA 110 University at Albany State University of New York Albany, NY 12222 U.S.A. Phone: (518) 442-4735 Fax: (518) 442-4736
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