Variance analysis and linear contracts in agencies with distorted performance measures
AbstractThis paper investigates the role of variance analysis procedures in aligning objectives under the condition of distorted performance measurement. A riskneutral agency with linear contracts is analyzed, whereby the agent receives postcontract, pre-decision information on his productivity. If the performance measure is informative with respect to the agentâ€™s marginal product concerning the principalâ€™s objective, variance investigation can alleviate effort misallocation. These results carry over to a participative budgeting situation, but in this case the variance investigation procedures are less demanding.
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Bibliographic InfoPaper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 206.
Date of creation: Apr 2007
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-06-11 (All new papers)
- NEP-BEC-2007-06-11 (Business Economics)
- NEP-EFF-2007-06-11 (Efficiency & Productivity)
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