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Subjective Performance Evaluation and Collusion

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  • Thiele, Veikko

Abstract

This paper considers a principal-agent relationship and explores the incentive provision when the agent's performance cannot be verified. It contrasts two alternatives for the principal to provide incentives: (i) to subjectively evaluate the agent's performance; and (ii), to delegate this task to a supervisor. Supervision induces contractible information about the agent's performance, but could result in vertical collusion. This paper demonstrates that collusion-proofness can require an inefficiently high payment to the supervisor, and too low powered incentives for the agent. The eventuality of collusion is further found to potentially (i), improve the profitability; and (ii), facilitate the achievement of relational contracts based upon subjective performance evaluations.

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File URL: http://mpra.ub.uni-muenchen.de/2472/
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File URL: http://mpra.ub.uni-muenchen.de/8327/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 2472.

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Date of creation: 31 Mar 2007
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Handle: RePEc:pra:mprapa:2472

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Keywords: Subjective performance measurement; collusion; relational contracts; limited liability; incentives;

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References

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  1. Jonathan Levin, 2000. "Relational Incentive Contracts," Working Papers 01002, Stanford University, Department of Economics.
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Cited by:
  1. Kräkel, Matthias, 2013. "Authority and Incentives in Organizations," IZA Discussion Papers 7271, Institute for the Study of Labor (IZA).
  2. Lucia Marchegiani & Tommaso Reggiani & Matteo Rizzolli, 2013. "Severity vs. Leniency Bias in Performance Appraisal: Experimental evidence," BEMPS - Bozen Economics & Management Paper Series BEMPS01, School of Economics and Management at the Free University of Bozen.

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