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On the Prudence of Rewarding A While Hoping for B

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  • Wendelin Schnedler

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Abstract

In multiple-task hidden-action models, the (mis-)allocation of effort may play an important role for benefit creation. Signals which capture this benefit and which are used in incentive schemes should thus not only be judged by the noise and the associated costs but also by the mis-allocation which they induce. How can mis-allocation be measured? This article presents two requirements for such a measure (invariance and monotonicity) and analyses whether they are met by proposed measures of mis-allocation. All examined measures assert that an unbiased signal for benefit leads to the lowest mis-allocation. Here, the signal leading to the lowest mis-allocation is computed and shown to be unbiased for the benefit only under restrictive assumptions on the cost function (equal marginal costs for different tasks). Generally, using an unbiased signal does not imply the lowest mis-allocation.

Suggested Citation

  • Wendelin Schnedler, 2003. "On the Prudence of Rewarding A While Hoping for B," The Centre for Market and Public Organisation 03/067, Department of Economics, University of Bristol, UK.
  • Handle: RePEc:bri:cmpowp:03/067
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    File URL: http://www.bris.ac.uk/Depts/CMPO/workingpapers/wp67.pdf
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    References listed on IDEAS

    as
    1. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, pages 927-940.
    2. George Baker, 2000. "The Use of Performance Measures in Incentive Contracting," American Economic Review, American Economic Association, vol. 90(2), pages 415-420, May.
    3. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    4. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-328, March.
    5. Macho-Stadler, Ines & Perez-Castrillo, J. David, 2001. "An Introduction to the Economics of Information: Incentives and Contracts," OUP Catalogue, Oxford University Press, edition 2, number 9780199243259.
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    Cited by:

    1. Oddvar M. Kaarbøe & Trond E. Olsen, 2008. "Distorted Performance Measures and Dynamic Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(1), pages 149-183, March.
    2. Thiele, Veikko, 2007. "Task-Specific Abilities in Multi-Task Agency Relations," MPRA Paper 2470, University Library of Munich, Germany.

    More about this item

    Keywords

    multitasking; LEN-model; hidden-action; moral hazard;

    JEL classification:

    • 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
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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