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Relative Performance Evaluation, Agent Hold-Up and Firm Organization

  • Kvaløy, Ola


    (Norwegian School of Hotel Management, Dept. of Business Administration, University of Stavanger)

  • Olsen, Trond E.


    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

We analyze a situation where common noise makes compensation based on relative performance evaluation (RPE) desirable, but where the agents' ability to hold-up values ex post obstruct the implementation of optimal RPE schemes. The principal can take actions to constrain the agents' hold-up power by limiting their outside options and by protecting property rights, but once these actions are costly, a trade-off between incentive provision and agent control appears. The model contributes to the theory of the firm. It indicates why firms, not agents, own assets, and why peer-dependent incentive systems are more common within than between firms.

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Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2007/26.

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Length: 23 pages
Date of creation: 30 Nov 2007
Date of revision:
Handle: RePEc:hhs:nhhfms:2007_026
Contact details of provider: Postal: NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Phone: +47 55 95 92 93
Fax: +47 55 95 96 50
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