Subjective evaluation versus public information

Helmut Bester and Johannes Münster

No 2013/6, Discussion Papers from Free University Berlin, School of Business & Economics

Abstract: This paper studies a principal-agent relation in which the principal's private information about the agent's effort choice is more accurate than a noisy public performance measure. For some contingencies the optimal contract has to specify ex post inefficiencies in the form of inefficient termination (firing the agent) or third-party payments (money burning). We show that money burning is the less efficient incentive device: it is used at most in addition to firing and only if the loss from termination is small. Under an optimal contract the agent's wage may depend only on the principal's report and not on the public signal. Nonetheless, public information is valuable as it facilitates truthful subjective evaluation by the principal.

Keywords: subjective evaluation; moral hazard; termination clauses; third-party payments (search for similar items in EconPapers)
JEL-codes: D23 D82 D86 J41 M12 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-cta and nep-hrm
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/74791/1/747562725.pdf (application/pdf)

Related works:
Journal Article: Subjective evaluation versus public information (2016)
Working Paper: Subjective Evaluation versus Public Information (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:fubsbe:20136

Access Statistics for this paper

More papers in Discussion Papers from Free University Berlin, School of Business & Economics Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().