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Subjective Evaluation In Agency Contracts

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  • SHINSUKE KAMBE

Abstract

We study how a principal uses her subjective evaluation of the agent's performance in an incentive contract. It is shown that the subjective evaluation can be used either 1) when there is no other information about the agent's performance and the principal is able to discard money, or 2) when the principal chooses between wage payment based on subjective evaluation by foregoing objective evaluation, and the one based only on the objective evaluation and when the subjective evaluation is sufficiently accurate. The principal pays a high fixed wage when her rating at the subjective evaluation is above a certain level. On the other hand, when it is below that level, she either pays a low fixed wage or obtains objective evaluation and pays based on its outcome.

Suggested Citation

  • Shinsuke Kambe, 2006. "Subjective Evaluation In Agency Contracts," The Japanese Economic Review, Japanese Economic Association, vol. 57(1), pages 121-140, March.
    • Handle: RePEc:bla:jecrev:v:57:y:2006:i:1:p:121-140
    DOI: 10.1111/j.1468-5876.2006.00311.x
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    Cited by:

    1. Lang, Matthias, 2019. "Communicating subjective evaluations," Journal of Economic Theory, Elsevier, vol. 179(C), pages 163-199.
    2. Marchegiani, Lucia & Reggiani, Tommaso & Rizzolli, Matteo, 2016. "Loss averse agents and lenient supervisors in performance appraisal," Journal of Economic Behavior & Organization, Elsevier, vol. 131(PA), pages 183-197.
    3. Ishiguro, Shingo & Yasuda, Yosuke, 2023. "Moral hazard and subjective evaluation," Journal of Economic Theory, Elsevier, vol. 209(C).

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