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"Yes Men," Integrity, and the Optimal Design of Incentive Contracts

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  • Ewerhart, Christian
  • Schmitz, Patrick W.

Abstract

In a pioneering approach towards the explanation of the phenomenon of "yes man" behavior in organizations, Prendergast (1993) argued that incentive contracts in employment relationships generally make a worker distort his privately acquired information. This would imply that there is a trade-off between inducing a worker to exert costly effort and inducing him to tell the truth. In contrast, we show that with optimally designed contracts, which we term integrity contracts, the worker will both exert effort and report his information truthfully, and that hence the first best can be achieved.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 12534.

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Date of creation: 2000
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Handle: RePEc:pra:mprapa:12534

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Keywords: Yes men; Incentive contracts; Integrity;

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References

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  1. Philippe Aghion & Jean Tirole, 1994. "Normal and Real Authority in Organizations," Working papers 94-13, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
  3. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Scholarly Articles 12375014, Harvard University Department of Economics.
  4. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Econometrica, Econometric Society, vol. 62(2), pages 257-82, March.
  5. Hermalin, Benjamin E & Katz, Michael L, 1993. "Judicial Modification of Contracts between Sophisticated Parties: A More Complete View of Incomplete Contracts and Their Breach," Journal of Law, Economics and Organization, Oxford University Press, vol. 9(2), pages 230-55, October.
  6. Edlin, Aaron S & Reichelstein, Stefan, 1996. "Holdups, Standard Breach Remedies, and Optimal Investment," American Economic Review, American Economic Association, vol. 86(3), pages 478-501, June.
  7. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
  8. Oliver Hart & John Moore, 1985. "Incomplete Contracts and Renegotiation," Working papers 367, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Georg Nöldeke & Klaus M. Schmidt, 1992. "Option Contracts and Renegotiation - A Solution to the Hold-Up Problem," Discussion Paper Serie A 417, University of Bonn, Germany, revised Aug 1993.
  10. William P. Rogerson, 1984. "Efficient Reliance and Damage Measures for Breach of Contract," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 39-53, Spring.
  11. Lewis, Tracy R & Sappington, David E M, 1997. "Information Management in Incentive Problems," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 796-821, August.
  12. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
  13. Cremer, J. & Khalil, F. & Rochet, J-C., 1997. "Contracts and productive information gathering," Discussion Paper Series In Economics And Econometrics 9707, Economics Division, School of Social Sciences, University of Southampton.
  14. Steven Shavell, 1994. "Acquisition and Disclosure of Information Prior to Sale," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 20-36, Spring.
  15. Hermalin, Benjamin E, 1998. "Toward an Economic Theory of Leadership: Leading by Example," American Economic Review, American Economic Association, vol. 88(5), pages 1188-1206, December.
  16. Chung, Tai-Yeong, 1991. "Incomplete Contracts, Specific Investments, and Risk Sharing," Review of Economic Studies, Wiley Blackwell, vol. 58(5), pages 1031-42, October.
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Citations

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Cited by:
  1. Kräkel, Matthias, 2006. "Firm Size, Economic Situation and Influence Activities," IZA Discussion Papers 2391, Institute for the Study of Labor (IZA).
  2. Ottaviani, Marco & Sorensen, Peter Norman, 2006. "Professional advice," Journal of Economic Theory, Elsevier, vol. 126(1), pages 120-142, January.
  3. Schmitz, Patrick W., 2001. "The Hold-Up Problem and Incomplete Contracts: A Survey of Recent Topics in Contract Theory," MPRA Paper 12562, University Library of Munich, Germany.
  4. Marco Ottaviani & Peter Norman Sorensen, 2002. "Professional Advice: The Theory of Reputational Cheap Talk," Discussion Papers 02-05, University of Copenhagen. Department of Economics.
  5. Christian Laux, 2001. "Delegated Information Acquisition and Capital Budgeting: On the Separation of Project Evaluation and Project Management," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 157(4), pages 591-, December.
  6. Wolfgang R. Köhler, 2004. "Optimal Incentive Contracts for Experts," Bonn Econ Discussion Papers bgse6_2004, University of Bonn, Germany.

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