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Managing performance evaluation systems: Relational incentives in the presence of learning-by-shirking

Author

Listed:
  • Li, Jin

    (Department of Management, London School of Economics)

  • Mukherjee, Arijit

    (Michigan State University, Department of Economics)

  • Vasconcelos, Luis

    (Department of Economics, University of Essex)

Abstract

An agent may privately learn which aspects of his responsibilities are more important by shirking on some of them and use that information in the future to shirk more effectively. In a model of long-term employment relationship, we characterize the optimal relational contract in the presence of such learning-by-shirking, and highlight how the performance measurement system can be managed to sharpen incentives. Two related policies are studied: intermittent replacement of existing measures, and adoption of new ones. In spite of the learning-by-shirking effect, the optimal contract is stationary and may involve stochastic replacement/adoption policies in order to dilute the agent's information rents from shirking.

Suggested Citation

  • Li, Jin & Mukherjee, Arijit & Vasconcelos, Luis, 2019. "Managing performance evaluation systems: Relational incentives in the presence of learning-by-shirking," Working Papers 2018-12, Michigan State University, Department of Economics.
    • Handle: RePEc:ris:msuecw:2018_012
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    References listed on IDEAS

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    More about this item

    Keywords

    Relational contracts; performance metrics; gaming; learning-by-shirking;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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