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Optimal Contracting with Subjective Evaluation

  • Bentley MacLeod

This paper extends the standard principal-agent model to allow for subjective evaluation. The optimal contract results in more compressed pay relative to the case with verifiable performance measures. Moreover, discrimination against an individual implies lower pay and performance, suggesting that the extent of discrimination as measured after controlling for performance may underestimate the level of true discrimination. Finally, the optimal contract entails the use of bonus pay rather than the threat of dismissal, hence neither "efficiency wages" nor the right to dismiss an employee are necessary ingredients for an optimal incentive contract.

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Paper provided by UCLA Department of Economics in its series Theory workshop papers with number 357966000000000036.

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Date of creation: 11 Oct 2001
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Handle: RePEc:cla:uclatw:357966000000000036
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  1. W. Bentley MacLeod & Daniel Parent, 1998. "Job Characteristics and the Form of Compensation," CIRANO Working Papers 98s-08, CIRANO.
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  8. Michihiro Kandori, 2001. "Introduction to Repeated Games with Private Monitoring," CIRJE F-Series CIRJE-F-114, CIRJE, Faculty of Economics, University of Tokyo.
  9. Cecilia Rouse & Claudia Goldin, 2000. "Orchestrating Impartiality: The Impact of "Blind" Auditions on Female Musicians," American Economic Review, American Economic Association, vol. 90(4), pages 715-741, September.
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  13. Pearce, David G. & Stacchetti, Ennio, 1998. "The Interaction of Implicit and Explicit Contracts in Repeated Agency," Games and Economic Behavior, Elsevier, vol. 23(1), pages 75-96, April.
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  15. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, vol. 56(2), pages 259-93, March.
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  19. Baker, George & Gibbons, Robert & Murphy, Kevin J, 1994. "Subjective Performance Measures in Optimal Incentive Contracts," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 1125-56, November.
  20. Sanford J Grossman & Oliver D Hart, 2001. "An Analysis of the Principal-Agent Problem," Levine's Working Paper Archive 391749000000000339, David K. Levine.
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  25. Bewley, Truman F, 1995. "A Depressed Labor Market as Explained by Participants," American Economic Review, American Economic Association, vol. 85(2), pages 250-54, May.
  26. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
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