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Relational Incentive Contracts and Performance Measurement

Chang Koo Chi () and Trond Olsen ()

No 7/2018, Discussion Paper Series in Economics from Norwegian School of Economics, Department of Economics

Abstract: This paper analyzes relational contracts under moral hazard. We first show that if the available information (signal) about effort satisfies a generalized monotone likelihood ratio property, then irrespective of whether the first-order approach (FOA) is valid or not, the optimal bonus scheme takes a simple form. The scheme rewards the agent a fixed bonus if his performance index exceeds a threshold, like the FOA contract of Levin (2003), but the threshold can be set differently. We next derive a sufficient and necessary condition for non-verifiable information to improve a relational contract. Our new informativeness criterion sheds light on the nature of an ideal performance measure in relational contracting.

Keywords: Relational contracts; non-verifiable performance measures; first-order approach; bonus scheme; informativeness criterions (search for similar items in EconPapers)
JEL-codes: D80 D86 L14 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2018-04-20
New Economics Papers: this item is included in nep-cta, nep-hrm and nep-mic
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