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The Effects of Interim Performance Evaluations under Risk Aversion

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Yurday, Zeynep

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Abstract

This paper reconsiders the applicability of a recently posed theoretical result concerning the optimality of not providing interim performance evaluations to the agent when implementing a given amount of total effort. The model used by Lizzeri, Meyers and Persico (2002) under the assumption of a risk neutral agent restricted by limited liability is analyzed when the agent is risk averse to show that interim performance evaluations do matter in reducing contract costs. In particular, they enable the principal to transfer the burden of insuring the agent against risk to the agent herself. Hence, the same incentives can be provided without as much consumption smoothing once performance information is revealed. On the other hand, when the incentive scheme is fixed, the risk averse agent may find it optimal to exert a greater amount of effort when performance evaluations are not revealed so as to insure herself against the possible losses that come with unexpected bad outcomes.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 1611.

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Date of creation: Sep 2003
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Handle: RePEc:pra:mprapa:1611

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Related research
Keywords: Performance Evaluation; Dynamic Contracts;

Find related papers by JEL classification:
D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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  1. Alessandro Lizzeri & Margaret A. Meyer & Nicola Persico, 2002. "The Incentive Effects of Interim Performance Evaluations," Penn CARESS Working Papers 592e9328faf6e775bf331e1c0, Penn Economics Department. [Downloadable!]
  2. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-67, November. [Downloadable!] (restricted)
  3. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January. [Downloadable!] (restricted)
  4. James A. Mirrlees, 1976. "The Optimal Structure of Incentives and Authority Within an Organization," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 105-131, Spring. [Downloadable!] (restricted)
  5. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January. [Downloadable!] (restricted)
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