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
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
New Economics Papers: this item is included in nep-cta, nep-hrm and nep-mic
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Working Paper: Relational Incentive Contracts and Performance Measurement (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:nhheco:2018_007
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