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Relative Performance Evaluation in a Multi-Plant Firm

  • Annalisa Luporini

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.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1420.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1420
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  1. Gibbons, R. & Murphy, K.J., 1989. "Relative Performance Evaluation For Chief Executive Officers," Working papers 532, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Paul Milgrom & Robert J. Weber, 1981. "A Theory of Auctions and Competitive Bidding," Discussion Papers 447R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-67, November.
  4. Paul R. Milgrom, 1979. "Good Nevs and Bad News: Representation Theorems and Applications," Discussion Papers 407R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Itoh Hideshi, 1993. "Coalitions, Incentives, and Risk Sharing," Journal of Economic Theory, Elsevier, vol. 60(2), pages 410-427, August.
  6. repec:oup:restud:v:51:y:1984:i:3:p:433-46 is not listed on IDEAS
  7. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September.
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