Optimal Contracts for Lenient Supervisors

Thomas Giebe () and Oliver Gürtler ()

No 237, Discussion Papers from SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: We consider a situation where an agent's effort is monitored by a supervisor who cares for the agent's well-being. This is modeled by incorporating the agent's utility into the utility function of the supervisor. The first-best solution can be implemented even if the supervisor's preferences are unknown. The corresponding optimal contract is similar to what we observe in practice: The supervisor's wage is constant and independent of his report. It induces one type of supervisor to report the agent's performance truthfully, while all others report favorably independent of performance. This implies that overstated performance (leniency bias) maybe the outcome of optimal contracts under informational asymmetries.

Keywords: Subjectiveperformanceevaluation; leniency; supervisor; privateinformation (search for similar items in EconPapers)
JEL-codes: D82 D86 J33 M52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-cta
Date: 2008-06
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