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Variance analysis and linear contracts in agencies with distorted performance measures

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Author Info
J”rg Budde (Jörg Budde, Department of Economics, University of Bonn, Adenauerallee 24-42, D-53113 Bonn; phone: +49-228-739247, Joerg.Budde@uni-bonn.de)
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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 206.

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Date of creation: Apr 2007
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Handle: RePEc:trf:wpaper:206

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Keywords: This 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 agent?s marginal product concerning the principal?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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