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Task Difficulty, Performance Measure Characteristics, and the Trade-Off between Insurance and Well-Allocated Effort

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  • Wendelin Schnedler

    () (University of Heidelberg, Department of Economics)

Abstract

When designing incentives for a manager, the trade-off between insurance and a "good" allocation of effort across various tasks is often identified with a trade-off between the responsiveness (sensitivity, precision, signal-noise ratio) of the performance measure and its similarity (congruity, congruence) to the benefit of the manager’s employer. A necessary condition for the trade-off between responsiveness and similarity to be meaningful is that a perfectly congruent measure creates a higher benefit than an equally responsive non-congruent measure. We show that this condition is met if and only if all tasks are exactly equally difficult and there are no spill-overs or synergies across tasks. This means that for most practical purposes, notions of responsiveness and similarity are not informative about the tradeoff between insurance and allocation. In order to understand this trade-off, task difficulty has also to be taken into account.

Suggested Citation

  • Wendelin Schnedler, 2006. "Task Difficulty, Performance Measure Characteristics, and the Trade-Off between Insurance and Well-Allocated Effort," Working Papers 0425, University of Heidelberg, Department of Economics, revised May 2006.
  • Handle: RePEc:awi:wpaper:0425
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    File URL: http://www.uni-heidelberg.de/md/awi/forschung/dp425.pdf
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    Cited by:

    1. Thiele, Veikko, 2007. "Performance measurement in multi-task agencies," Research in Economics, Elsevier, vol. 61(3), pages 148-163, September.

    More about this item

    Keywords

    hidden action; multitasking; incentives;

    JEL classification:

    • 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
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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