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Specific knowledge and performance measurement

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  • Michael Raith

Abstract

I examine optimal incentives and performance measurement in a model where an agent has specific knowledge (in the sense of Jensen and Meckling) about the consequences of his actions for the principal. Contracts can be based both on input measures related to the agent's actions and an output measure related to the principal's payoff. Whereas input-based pay minimizes income risk, only output-based pay encourages the agent to use his knowledge efficiently. In general, it is optimal to use both kinds of performance measures. The results help to explain some empirical puzzles and lead to several new predictions. Copyright (c) 2008, RAND.

Suggested Citation

  • Michael Raith, 2008. "Specific knowledge and performance measurement," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 1059-1079.
  • Handle: RePEc:bla:randje:v:39:y:2008:i:4:p:1059-1079
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    2. Gottardi, Piero & Tallon, Jean Marc & Ghirardato, Paolo, 2017. "Flexible contracts," Games and Economic Behavior, Elsevier, vol. 103(C), pages 145-167.
    3. Chang, Ya-Kai & Chen, Yu-Lun & Chou, Robin K. & Huang, Tai-Hsin, 2015. "Corporate governance, product market competition and dynamic capital structure," International Review of Economics & Finance, Elsevier, vol. 38(C), pages 44-55.
    4. Jed Devaro & Fidan Ana Kurtulus, 2010. "An Empirical Analysis of Risk, Incentives and the Delegation of Worker Authority," ILR Review, Cornell University, ILR School, vol. 63(4), pages 641-661, July.
    5. Nannerup, Niels & Olsen, Kasper Krogh, 2014. "Multitasking and performance measurement," Discussion Papers of Business and Economics 20/2014, University of Southern Denmark, Department of Business and Economics.
    6. Anthony M. Marino & Ján Zábojník, 2008. "Work-related perks, agency problems, and optimal incentive contracts," RAND Journal of Economics, RAND Corporation, vol. 39(2), pages 565-585.
    7. Ben-Ner, Avner & Kong, Fanmin & Lluis, Stéphanie, 2012. "Uncertainty, task environment, and organization design: An empirical investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 281-313.
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    12. Ana-Maria Godeanu, 2012. "The antecedents of satisfaction with pay in teams: do performance-based compensation and autonomy keep team-members satisfied?," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 3, pages 145-168, June.
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    14. Chen, Bo, 2012. "All-or-nothing payments," Journal of Mathematical Economics, Elsevier, vol. 48(3), pages 133-142.
    15. Jed De Varo & Suraj Prasad, 2015. "The Relationship between Delegation and Incentives Across Occupations: Evidence and Theory," Journal of Industrial Economics, Wiley Blackwell, vol. 63(2), pages 279-312, June.
    16. Alberto Bayo-Moriones & Jose E. Galdon-Sanchez & Sara Martinez-de-Morentin, 2017. "Performance Measurement and Incentive Intensity," Journal of Labor Research, Springer, vol. 38(4), pages 496-546, December.
    17. Piero Gottardi & Jean-Marc Tallon & Paolo Ghirardato, 2015. "Flexible contracts," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01238046, HAL.
    18. Engert, Andreas & Goldlücke, Susanne, 2013. "Why agents need discretion: The business judgment rule as optimal standard of care," Working Papers 13-04, University of Mannheim, Department of Economics.
    19. Fich, Eliezer M. & Starks, Laura T. & Yore, Adam S., 2014. "CEO deal-making activities and compensation," Journal of Financial Economics, Elsevier, vol. 114(3), pages 471-492.
    20. Shi, Lan, 2011. "Respondable risk and incentives for CEOs: The role of information-collection and decision-making," Journal of Corporate Finance, Elsevier, vol. 17(1), pages 189-205, February.
    21. Antti Kauhanen & Sami Napari, 2012. "Performance Measurement and Incentive Plans," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 51(3), pages 645-669, July.
    22. DeVaro, Jed, 2011. "Using "opposing responses" and relative performance to distinguish empirically among alternative models of promotions," MPRA Paper 35175, University Library of Munich, Germany.
    23. repec:bla:abacus:v:52:y:2016:i:4:p:685-771 is not listed on IDEAS

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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