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Performance measurement in multi-task agencies

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Listed author(s):
  • Thiele, Veikko

Abstract

This paper analyzes a multi-task agency model with a risk-neutral and financially constrained agent. The agent's performance evaluation is thereby incongruent, i.e. it does not perfectly reflect the relative contribution of the agent's multi-dimensional effort to firm's profit. This paper elaborates on the improvement of the agent's performance evaluation through the costly acquisition of additional performance measures aimed at inducing the agent to implement a more efficient effort allocation across tasks. It contrasts two alternatives for the principal: (i) to centrally invest in the information acquisition; or (ii), to delegate this task to a supervisor. This paper demonstrates that the principal generally favors delegation for a sufficiently incongruent measurement of the agent's performance, and a centralized investment, otherwise.

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Article provided by Elsevier in its journal Research in Economics.

Volume (Year): 61 (2007)
Issue (Month): 3 (September)
Pages: 148-163

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Handle: RePEc:eee:reecon:v:61:y:2007:i:3:p:148-163
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622941

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Find related papers by JEL classification:
  • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
  • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
  • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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  1. Wendelin Schnedler, 2003. "Task Difficulty, Performance Measure Characteristics, and the Trade-Off between Insurance and Well-Allocated Effort," Bonn Econ Discussion Papers bgse7_2003, University of Bonn, Germany, revised May 2006.
  2. Paul Oyer, 1998. "Fiscal Year Ends and Nonlinear Incentive Contracts: The Effect on Business Seasonality," The Quarterly Journal of Economics, Oxford University Press, vol. 113(1), pages 149-185.
  3. George Baker, 2000. "The Use of Performance Measures in Incentive Contracting," American Economic Review, American Economic Association, vol. 90(2), pages 415-420, May.
  4. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
  5. Villadsen, Bente, 1995. "Communication and delegation in collusive agencies," Journal of Accounting and Economics, Elsevier, vol. 19(2-3), pages 315-344, April.
  6. Kofman, Fred & Lawarree, Jacques, 1993. "Collusion in Hierarchical Agency," Econometrica, Econometric Society, vol. 61(3), pages 629-656, May.
  7. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
  8. Pitchford, Rohan, 1998. "Moral hazard and limited liability: The real effects of contract bargaining," Economics Letters, Elsevier, vol. 61(2), pages 251-259, November.
  9. Robert Gibbons, 1998. "Incentives in Organizations," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 115-132, Fall.
  10. Thiele, Veikko, 2007. "Task-Specific Abilities in Multi-Task Agency Relations," MPRA Paper 2470, University Library of Munich, Germany.
  11. Robert Gibbons, 2005. "Incentives Between Firms (and Within)," Management Science, INFORMS, vol. 51(1), pages 2-17, January.
  12. George Baker, 2002. "Distortion and Risk in Optimal Incentive Contracts," Journal of Human Resources, University of Wisconsin Press, vol. 37(4), pages 728-751.
  13. Prendergast, Canice & Topel, Robert H, 1996. "Favoritism in Organizations," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 958-978, October.
  14. George Baker & Robert Gibbons & Kevin J. Murphy, 1994. "Subjective Performance Measures in Optimal Incentive Contracts," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 1125-1156.
  15. Gibbs, Michael & Merchant, Kenneth A. & Van der Stede, Wim A. & Vargus, Mark A., 2004. "Performance Measure Properties and Incentives," IZA Discussion Papers 1356, Institute for the Study of Labor (IZA).
  16. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
  17. Lambert, Richard A., 2001. "Contracting theory and accounting," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 3-87, December.
  18. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts and the Theory of the Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 39-84.
  19. Brickley, James A. & Zimmerman, Jerold L., 2001. "Changing incentives in a multitask environment: evidence from a top-tier business school," Journal of Corporate Finance, Elsevier, vol. 7(4), pages 367-396, December.
  20. Demougin, Dominique & Fluet, Claude, 2001. "Monitoring versus incentives," European Economic Review, Elsevier, vol. 45(9), pages 1741-1764, October.
  21. Tirole, Jean, 1986. "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(2), pages 181-214, Fall.
  22. Park, Eun-Soo, 1995. "Incentive Contracting under Limited Liability," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(3), pages 477-490, Fall.
  23. Son Ku Kim, 1997. "Limited Liability and Bonus Contracts," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 899-913, December.
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Cited by:

  1. Veikko Thiele, 2009. "Aggregating Performance Measures in Multi-Task Agencies," Economics Bulletin, AccessEcon, vol. 29(4), pages 2693-2699.

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