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Relative Performance Evaluation, Agent Hold-Up and Firm Organization

Author

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  • 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)

Abstract

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.

Suggested Citation

  • Kvaløy, Ola & Olsen, Trond E., 2007. "Relative Performance Evaluation, Agent Hold-Up and Firm Organization," Discussion Papers 2007/26, Norwegian School of Economics, Department of Business and Management Science.
    • Handle: RePEc:hhs:nhhfms:2007_026
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    File URL: http://hdl.handle.net/11250/163918
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    Cited by:

    1. Ola Kvaløy & Trond E. Olsen, 2008. "Cooperation in Knowledge-Intensive Firms," Journal of Human Capital, University of Chicago Press, vol. 2(4), pages 410-440.

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    More about this item

    Keywords

    Relational contracts; multiagent moral hazard; endogenous hold-up;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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