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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
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    References listed on IDEAS

    as
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    Keywords

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    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

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