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Distorted performance measurement and relational contracts

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Author Info
J”rg Budde (J”rg Budde, Department of Economics, University of Bonn, Adenauerallee 24-42, D-53113 Bonn; phone: +49-228-739247, Joerg.Budde@uni-bonn.de)
Abstract

This paper analyzes the use of alternative performance measures in an agency model in which contracting incorporates both formal and informal agreements. It is shown that under a proper use of verifiable and unverifiable performance measures, the two types of contracts are complements, regardless of the principal?s fallback position. The analysis therefore contrasts earlier results of the literature, and provides a rationale for the application of subjective performance information, as it is frequently incorporated in strategic performance measurement systems.

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Publisher Info
Paper provided by SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Papers with number 203.

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Date of creation: Nov 2006
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Handle: RePEc:trf:wpaper:203

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. George Baker, 2000. "The Use of Performance Measures in Incentive Contracting," American Economic Review, American Economic Association, vol. 90(2), pages 415-420, May. [Downloadable!] (restricted)
  2. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts And The Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 39-84, February. [Downloadable!] (restricted)
  3. Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-96, March. [Downloadable!] (restricted)
  4. Pearce, David G. & Stacchetti, Ennio, 1998. "The Interaction of Implicit and Explicit Contracts in Repeated Agency," Games and Economic Behavior, Elsevier, vol. 23(1), pages 75-96, April. [Downloadable!] (restricted)
  5. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
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  1. Jens Robert Schöndube, 2007. "Early versus late effort in dynamic agencies with learning about productivity," FEMM Working Papers 07026, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management. [Downloadable!]
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