The Ignored Performance Measure

Volker Laux

Journal of Economics & Management Strategy, 2006, vol. 15, issue 3, 707-733

Abstract: This paper studies a setting in which a risk‐averse agent must be motivated to work on two tasks: evaluating a potential project and, if the project is adopted, implementing it. Although a performance measure that is informative of an agent's action is typically valuable because it can be used to improve the risk sharing of the contract, this is not necessarily the case in this two‐task setting. I provide a sufficient condition under which a performance measure that is informative of the agent's implementation effort is worthless for contracting despite the agent being risk averse. This shows that information content is a necessary but not a sufficient condition for a performance measure to be valuable.

Date: 2006
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