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Transparency and Performance Evaluation in Sequential Agency

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  • Susumu Cato
  • Akifumi Ishihara

Abstract

This study investigates the effects of transparency in a sequential moral hazard problem, where a leader and a follower consecutively take an action. The principal chooses whether the organization is transparent or opaque, by which we mean that the action of the leader is observable to the follower or not. Compared with the opaque organization, the transparent organization imposes an additional incentive constraint on the follower but may relax the incentive constraint on the leader. Informativeness of the signal crucially affects the optimal degree of transparency as well as the optimal incentive scheme. The transparent (respectively, opaque) organization tends to be preferred when the optimal incentive contract exhibits joint (respectively, relative) performance evaluation.

Suggested Citation

  • Susumu Cato & Akifumi Ishihara, 2017. "Transparency and Performance Evaluation in Sequential Agency," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 33(3), pages 475-506.
    • Handle: RePEc:oup:jleorg:v:33:y:2017:i:3:p:475-506.
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    File URL: http://hdl.handle.net/10.1093/jleorg/ewx008
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    References listed on IDEAS

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    Cited by:

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    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • D20 - Microeconomics - - Production and Organizations - - - General

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