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On the Prudence of Rewarding A While Hoping for B

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  • Schnedler, Wendelin

    (University of Paderborn)

Abstract

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.

Suggested Citation

  • Schnedler, Wendelin, 2003. "On the Prudence of Rewarding A While Hoping for B," IZA Discussion Papers 765, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp765
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    References listed on IDEAS

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    Cited by:

    1. Marisa Ratto & Wendelin Schnedler, 2005. "Division of Labour and Directed Production," The Centre for Market and Public Organisation 05/126, The Centre for Market and Public Organisation, University of Bristol, UK.
    2. repec:awi:wpaper:0468 is not listed on IDEAS
    3. Thiele, Veikko, 2007. "Task-Specific Abilities in Multi-Task Agency Relations," MPRA Paper 2470, University Library of Munich, Germany.
    4. repec:awi:wpaper:0421 is not listed on IDEAS
    5. Oddvar M. Kaarbøe & Trond E. Olsen, 2008. "Distorted Performance Measures and Dynamic Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(1), pages 149-183, March.
    6. Gürtler, Oliver, 2006. "Optimal Ownership Structures in the Presence of Investment Signals," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 103, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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    More about this item

    Keywords

    moral hazard; multitasking; LEN-model; hidden-action;
    All these keywords.

    JEL classification:

    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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