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Relative performance evaluation, agent hold-up and firm organization

  • Kvaløy, Ola
  • Olsen, Trond E.

We analyze a situation where common noise makes compensation based on relative performance evaluation (RPE) desirable, but where the agents' ability to hold-up values ex post obstruct the implementation of optimal RPE schemes. The principal can take actions to constrain the agents' hold-up power by limiting their outside options and by protecting property rights, but once these actions are costly, a trade-off between incentive provision and agent control appears. The model contributes to the theory of the firm. It indicates why firms, not agents, own assets, and why peer-dependent incentive systems are more common within than between firms. J. Japanese Int. Economies 22 (2) (2008) 229-241.

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Article provided by Elsevier in its journal Journal of the Japanese and International Economies.

Volume (Year): 22 (2008)
Issue (Month): 2 (June)
Pages: 229-241

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Handle: RePEc:eee:jjieco:v:22:y:2008:i:2:p:229-241
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