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Optimal Contracts for Lenient Supervisors

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Author Info
Thomas Giebe (Thomas Giebe, Department of Economics, Economic Theory I, Humboldt University Berlin, Spandauer Stra_e 1, D-10178 Berlin, Germany, e-mail: thomas.giebe@wiwi.huberlin.de)
Oliver Gürtler (Oliver Gürtler, Department of Economics, BWL II, University of Bonn, Adenauerallee 24-42, 53113 Bonn, Germany, e-mail: oliver.guertler@uni-bonn.de)

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Abstract

We consider a situation where an agent's effort is monitored by a supervisor who cares for the agent's well-being. This is modeled by incorporating the agent's utility into the utility function of the supervisor. The first-best solution can be implemented even if the supervisor's preferences are unknown. The corresponding optimal contract is similar to what we observe in practice: The supervisor's wage is constant and independent of his report. It induces one type of supervisor to report the agent's performance truthfully, while all others report favorably independent of performance. This implies that overstated performance (leniency bias) maybe the outcome of optimal contracts under informational asymmetries.

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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 237.

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Date of creation: Jun 2008
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Handle: RePEc:trf:wpaper:237

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Related research
Keywords: Subjectiveperformanceevaluation leniency supervisor privateinformation

Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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  12. Grund, Christian & Przemeck, Judith, 2008. "Subjective Performance Evaluation and Inequality Aversion," IZA Discussion Papers 3382, Institute for the Study of Labor (IZA). [Downloadable!]
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  14. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March. [Downloadable!] (restricted)
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    Other versions:
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