Money burning in subjective evaluation and limited liability: A case for pay for performance

Parimal K. Bag and Neng Qian

Economics Letters, 2019, vol. 174, issue C, 208-213

Abstract: Research on subjective evaluation in principal–agent models have shown that the optimal contract should give uniform reward with zero money burning at all but the worst performance. In a static game involving two independent tasks with only high or low output possible, it is shown that when the agent is subjected to limited liability the optimal contract is more likely to exhibit ‘pay for performance’: full money burning if both tasks yield low outputs, partial money burning for mixed performance of low and high outputs, and zero money burning following high output in both tasks.

Keywords: Subjective evaluation; Money burning; Wage compression; Pay for performance; Limited liability (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:174:y:2019:i:c:p:208-213

DOI: 10.1016/j.econlet.2018.11.016

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