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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. Oliver Hart & John Moore, 1985. "Incomplete Contracts and Renegotiation," Working papers 367, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Benjamin E. Hermalin, 1997. "Toward an Economic Theory of Leadership: Leading by Example," Microeconomics 9612002, EconWPA.
  3. Khalil, F & Rochet, J-C, 1997. "Contracts and Productive Information Gathering," Working Papers 97-16, University of Washington, Department of Economics.
  4. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
  5. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Econometrica, Econometric Society, vol. 62(2), pages 257-82, March.
  6. Chung, Tai-Yeong, 1991. "Incomplete Contracts, Specific Investments, and Risk Sharing," Review of Economic Studies, Wiley Blackwell, vol. 58(5), pages 1031-42, October.
  7. 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.
  8. Nöldeke, Georg & Schmidt, Klaus M., 1995. "Option contracts and renegotiation: A solution to the Hold-Up Problem," Munich Reprints in Economics 19329, University of Munich, Department of Economics.
  9. Philippe Aghion & Jean Tirole, 1994. "Formal and Real Authority in Organizations," Working papers 95-8, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Sanford J Grossman & Oliver D Hart, 2001. "An Analysis of the Principal-Agent Problem," Levine's Working Paper Archive 391749000000000339, David K. Levine.
  11. 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.
  12. 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.
  13. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
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Cited by:
  1. 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.
  2. Marco Ottaviani & Peter Norman Sorensen, 2002. "Professional Advice: The Theory of Reputational Cheap Talk," Discussion Papers 02-05, University of Copenhagen. Department of Economics.
  3. Wolfgang R. Köhler, 2004. "Optimal Incentive Contracts for Experts," Bonn Econ Discussion Papers bgse6_2004, University of Bonn, Germany.
  4. Marco Ottaviani & Peter Sorensen, 1999. "Professional Advice," Game Theory and Information 9906003, EconWPA.
  5. 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.
  6. Kräkel, Matthias, 2006. "Firm Size, Economic Situation and Influence Activities," IZA Discussion Papers 2391, Institute for the Study of Labor (IZA).

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