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Correlation and relative performance evaluation

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  • Fleckinger, Pierre

Abstract

This paper reexamines the issue of relative versus joint incentive schemes in a multi-agent moral-hazard framework. The model allows a full analysis of the information and dependence structure. An important result is that the widespread notion that greater correlation in outcomes calls for more competition is not robust. First, when the dependence structure is effort-sensitive, the optimal incentive scheme in general mixes elements of relative evaluation and joint evaluation. Second, under limited liability, higher equilibrium correlation tends to make joint performance evaluation more desirable. Examples are provided regarding incentives in firms, finance and innovation.

Suggested Citation

  • Fleckinger, Pierre, 2012. "Correlation and relative performance evaluation," Journal of Economic Theory, Elsevier, vol. 147(1), pages 93-117.
  • Handle: RePEc:eee:jetheo:v:147:y:2012:i:1:p:93-117
    DOI: 10.1016/j.jet.2011.11.016
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    Cited by:

    1. Kellner, Christian, 2015. "Tournaments as a response to ambiguity aversion in incentive contracts," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 627-655.
    2. Joyee Deb & Jin Li & Arijit Mukherjee, 2015. "Relational Contracts with Subjective Peer Evaluations," Cowles Foundation Discussion Papers 1995, Cowles Foundation for Research in Economics, Yale University.
    3. Tong Wang & Seong Cheol Park, 2014. "Livestock Disease Indemnity Design under Common Uncertainty: A Multi-agent Problem," Economics Bulletin, AccessEcon, vol. 34(3), pages 1396-1409.
    4. Daske, Thomas, 2016. "Pooling hawks and doves: Interim-efficient labor contracts for other-regarding agents," Annual Conference 2016 (Augsburg): Demographic Change 145951, Verein für Socialpolitik / German Economic Association.
    5. Kirchmaier, Isadora, 2014. "Service Organizations: Customer Contact and Incentives of Knowledge Managers," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100418, Verein für Socialpolitik / German Economic Association.
    6. Kvaløy, Ola & Olsen, Trond E., 2016. "Teams in Relational Contracts," Discussion Papers 2016/23, Norwegian School of Economics, Department of Business and Management Science.

    More about this item

    Keywords

    Moral hazard; Correlation; Relative vs joint performance evaluation;

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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