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Renegotiation and Relative Performance Evaluation: Why an Informative Signal may be Useless

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  • Yim, Andrew

Abstract

Although Holmstrom’s informativeness criterion provides a theoretical foundation for the controllability principle and interfirm relative performance evaluation, empirical and field studies provide only weak evidence on such practices. This paper refines the traditional informativeness criterion by abandoning the conventional full-commitment assumption. With the possibility of renegotiation, a signal’s usefulness in incentive contracting depends on its information quality, not simply on whether the signal is informative. This paper derives conditions for determining when a signal is useless and when it is useful. In particular, these conditions will be met when the signal’s information quality is either sufficiently poor or sufficiently rich. (JEL C72, D82).

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27855.

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Date of creation: 28 Oct 2000
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Publication status: Published in Review of Accounting Studies 1.6(2001): pp. 77-108
Handle: RePEc:pra:mprapa:27855

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Keywords: informativeness; monitoring; renegotiation; principal-agent model;

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  1. Robert Gibbons & Kevin Murphy, 1989. "Relative Performance Evaluation for Chief Executive Officers," Working Papers 628, Princeton University, Department of Economics, Industrial Relations Section..
  2. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  3. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September.
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