Distorted Performance Measures and Dynamic Incentives

Oddvar Kaarboe () and Trond Olsen

No 07/06, Working Papers in Economics from University of Bergen, Department of Economics

Abstract: Incentive contracts must typically be based on performance measures that do not exactly match agents’ true contribution to principals’ objectives. Such misalignment may impose difficulties for effective incentive design. We analyze to what extent implicit dynamic incentives such as career concerns and ratchet effects alleviate or aggravate these problems. Our analysis demonstrates that the interplay between distorted performance measures and implicit incentives implies that career and ratchet effects have real effects, that stronger ratchet effects or more distortion may increase optimal monetary incentives, and that bureaucratic promotion rules may be optimal.

Keywords: Search; Learning; Information and Knowledge; Communication; Belief; Compensation Packages; Payment Methods; Labor Management. (search for similar items in EconPapers)
JEL-codes: D83 J33 M54 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2006-06-09
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Related works:
Journal Article: Distorted Performance Measures and Dynamic Incentives (2008)
Working Paper: Distorted Performance Measures and Dynamic Incentives (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:bergec:2006_007

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