On the Prudence of Rewarding A While Hoping for B
In multiple-task hidden-action models, the (mis-)allocation of effort may play an important role for benefit creation. Signals which capture this benefit and which are used in incentive schemes should thus not only be judged by the noise and the associated costs but also by the mis-allocation which they induce. How can mis-allocation be measured? This article presents two requirements for such a measure (invariance and monotonicity) and analyses whether they are met by proposed measures of mis-allocation. All examined measures assert that an unbiased signal for benefit leads to the lowest misallocation. Here, the signal leading to the lowest mis-allocation is computed and shown to be unbiased for the benefit only under restrictive assumptions on the cost function (equal marginal costs for different tasks). Generally, using an unbiased signal does not imply the lowest mis-allocation.
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| Length: | 27 pages |
| Date of creation: | Apr 2003 |
| Date of revision: | |
| Handle: | RePEc:iza:izadps:dp765 |
| Contact details of provider: | Postal: IZA, P.O. Box 7240, D-53072 Bonn, Germany Phone: +49 228 3894 223 Fax: +49 228 3894 180 Web page: http://www.iza.org
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References listed on IDEAS
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OUP Catalogue,
Oxford University Press,
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- Macho-Stadler, Ines & Perez-Castrillo, J. David, 2001. "An Introduction to the Economics of Information: Incentives and Contracts," OUP Catalogue, Oxford University Press, edition 2, number 9780199243273, December.
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