IDEAS home Printed from https://ideas.repec.org/p/lar/wpaper/2003-03.html
   My bibliography  Save this paper

Subjective evaluation, ambiguity and relational contracts

Author

Listed:
  • Brigitte Godbillon-Camus

    () (Laboratoire de Recherche en Gestion et Economie, Institut d'Etudes Politiques, Strasbourg)

Abstract

The current theoretical literature on contracts with compensation system based on subjective performance measures (Prendergast [1999]) which deals with the principal-agent relationship with moral hazard, assumes that these measures have the advantage of giving a more comprehensive view of the agent's performance but the disadvantage of being impossible to verify by a third party. However, the vagueness of the subjective evaluations is not considered. This paper introduces therefore this characteristic of the subjective performance measure of being vague for the agent. To formalize this vagueness, we add to the basic agency model the assumption that there are several signals available as subjective measure and that the agent does not receive enough information to form a unique prior on the set of signals. Hence the agent has ambiguous beliefs on principal's reference signal. We show then that the efficiency and credibility properties of the combination of formal and relational contracts, with the formal contract based on objective evaluations and the relational contract based on subjective evaluations, are no longer satisfied and depend on the agent’s behavior with regard to ambiguity.

Suggested Citation

  • Brigitte Godbillon-Camus, 2003. "Subjective evaluation, ambiguity and relational contracts," Working Papers of LaRGE Research Center 2003-03, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
  • Handle: RePEc:lar:wpaper:2003-03
    as

    Download full text from publisher

    File URL: http://ifs.u-strasbg.fr/large/publications/2003/2003-03.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Baker, George P & Jensen, Michael C & Murphy, Kevin J, 1988. " Compensation and Incentives: Practice vs. Theory," Journal of Finance, American Finance Association, vol. 43(3), pages 593-616, July.
    2. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    3. Gilboa Itzhak & Schmeidler David, 1993. "Updating Ambiguous Beliefs," Journal of Economic Theory, Elsevier, vol. 59(1), pages 33-49, February.
    4. George Baker & Robert Gibbons & Kevin J. Murphy, 1994. "Subjective Performance Measures in Optimal Incentive Contracts," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 1125-1156.
    5. Kin Chung Lo, 1998. "Sealed bid auctions with uncertainty averse bidders," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 12(1), pages 1-20.
    6. Javier M. LÕpez-Cunat, 2000. "Adverse selection under ignorance," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 16(2), pages 379-399.
    7. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-328, March.
    8. 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.
    9. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-587, May.
    10. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
    11. Clive Bull, 1987. "The Existence of Self-Enforcing Implicit Contracts," The Quarterly Journal of Economics, Oxford University Press, vol. 102(1), pages 147-159.
    12. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    13. 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.
    14. Fellingham, John C. & Newman, D. Paul & Suh, Yoon S., 1985. "Contracts without memory in multiperiod agency models," Journal of Economic Theory, Elsevier, vol. 37(2), pages 340-355, December.
    15. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts and the Theory of the Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 39-84.
    16. Maskin, Eric & Tirole, Jean, 1990. "The Principal-Agent Relationship with an Informed Principal: The Case of Private Values," Econometrica, Econometric Society, vol. 58(2), pages 379-409, March.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Ambiguity; moral hazard; relational contract; subjective evaluation.;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:lar:wpaper:2003-03. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christophe J. Godlewski) or (Rebekah McClure). General contact details of provider: http://edirc.repec.org/data/lastrfr.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.