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The bonding cost in subjective performance evaluation

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  • Mitsuhashi, Hikaru
  • Ohta, Yasuhiro

Abstract

This paper studies the optimal contract under conditions where the principal modifies the level of subjectivity in performance evaluation, thereby augmenting the existing literature that assumes subjective evaluations as fully unverifiable. The level of subjectivity represents the ease with which the principal can modify evaluations, and this choice impacts the costs of implementation and alteration. We show that in the optimal contract, the principal invariably engages in downward adjustments of evaluation and that the principal determines the level of subjectivity through a trade-off between providing incentives to the agent and making these downward revisions.

Suggested Citation

  • Mitsuhashi, Hikaru & Ohta, Yasuhiro, 2024. "The bonding cost in subjective performance evaluation," Economics Letters, Elsevier, vol. 234(C).
    • Handle: RePEc:eee:ecolet:v:234:y:2024:i:c:s0165176523004913
    DOI: 10.1016/j.econlet.2023.111465
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    References listed on IDEAS

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    3. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    4. Bentley W. MacLeod, 2003. "Optimal Contracting with Subjective Evaluation," American Economic Review, American Economic Association, vol. 93(1), pages 216-240, March.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Subjective performance evaluation; Moral hazard; Compensation contracts;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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