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Distorted Performance Measurement And Relational Contracts

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  • Jörg Budde

Abstract

I analyze the use of alternative performance measures using an agency model that incorporates both formal and informal agreements. I show that under the proper combination of verifiable and unverifiable performance measures, the two types of contract complement each other regardless of the principal’s fallback position. To obtain this complementarity, the principal uses an opting-out clause that allows him to replace part of a piece rate by a predefined bonus. My analysis contrasts with earlier studies, and provides a rationale for the use of subjective information in strategic performance measurement systems.

Suggested Citation

  • Jörg Budde, 2008. "Distorted Performance Measurement And Relational Contracts," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 60(3), pages 251-273, July.
  • Handle: RePEc:sbr:abstra:v:60:y:2008:i:3:p:251-273
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    Keywords

    Congruity; Distortion; Opting-Out Clause;

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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