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Relative Performance Evaluation in a Multi-Plant Firm

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  • Annalisa Luporini

Abstract

We analyze optimal compensation schedules for the directors of two plants belonging to the same owner and producing the same good but serving geographically differentiated markets. Since the outcome of each director depends on his own effort and on a random variable representing market conditions, the problem takes the form of a principal multi-agent model. We first provide appropriate extensions of the MLR and CDF conditions that ensure the validity of the first-order approach in the single agent case. Then, we show that affiliation of the random variables is a necessary and sufficient condition for the compensation of one director to negatively and monotonically depend on the performance of the other.

Suggested Citation

  • Annalisa Luporini, 2005. "Relative Performance Evaluation in a Multi-Plant Firm," CESifo Working Paper Series 1420, CESifo.
    • Handle: RePEc:ces:ceswps:_1420
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    References listed on IDEAS

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    1. Itoh Hideshi, 1993. "Coalitions, Incentives, and Risk Sharing," Journal of Economic Theory, Elsevier, vol. 60(2), pages 410-427, August.
    2. Robert Gibbons & Kevin J. Murphy, 1989. "Relative Performance Evaluation for Chief Executive Officers," Working Papers 628, Princeton University, Department of Economics, Industrial Relations Section..
    3. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-1367, November.
    4. Robert Gibbons & Kevin J. Murphy, 1990. "Relative Performance Evaluation for Chief Executive Officers," ILR Review, Cornell University, ILR School, vol. 43(3), pages 30, April.
    5. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-1190, September.
    6. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
    7. Antle, R & Smith, A, 1986. "An Empirical-Investigation Of The Relative Performance Evaluation Of Corporate-Executives," Journal of Accounting Research, Wiley Blackwell, vol. 24(1), pages 1-39.
    8. Janakiraman, Sn & Lambert, Ra & Larcker, Df, 1992. "An Empirical-Investigation Of The Relative Performance Evaluation Hypothesis," Journal of Accounting Research, Wiley Blackwell, vol. 30(1), pages 53-69.
    9. Dilip Mookherjee, 1984. "Optimal Incentive Schemes with Many Agents," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 433-446.
    10. 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.
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    Citations

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    Cited by:

    1. Alessandro Cigno & Annalisa Luporini, 2009. "Scholarships or Student Loans? Subsidizing Higher Education in the Presence of Moral Hazard," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 11(1), pages 55-87, February.
    2. Alessandro Cigno & Annalisa Luporini, 2011. "Optimal Family Policy in the Presence of Moral Hazard when the Quantity and Quality of Children are Stochastic," CESifo Economic Studies, CESifo Group, vol. 57(2), pages 349-364, June.
    3. Liang, Wen-Jung & Tseng, Ching-Chih & Wang, Kuang-Cheng Andy, 2011. "Location choice with delegation: Bertrand vs. Cournot competition," Economic Modelling, Elsevier, vol. 28(4), pages 1774-1781, July.
    4. Pierre Fleckinger & David Martimort & Nicolas Roux, 2024. "Should They Compete or Should They Cooperate? The View of Agency Theory," Journal of Economic Literature, American Economic Association, vol. 62(4), pages 1589-1646, December.
    5. Fleckinger, Pierre, 2012. "Correlation and relative performance evaluation," Journal of Economic Theory, Elsevier, vol. 147(1), pages 93-117.
    6. Alessandro Cigno & Annalisa Luporini, 2006. "Optimal Policy Towards Families with Different Amounts of Social Capital, in the Presence of Asymmetric Information and Stochastic Fertility," CESifo Working Paper Series 1664, CESifo.

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    More about this item

    Keywords

    principal-agent problems; relative performance evaluation; first-order approach; monotone likelihood ratio; affiliation;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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