Relative Performance Evaluation, Agent Hold-Up and Firm Organization

Ola Kvaløy and Trond Olsen

No 2007/26, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: We analyze a situation where common noise makes compensation based on relative performance evaluation (RPE) desirable, but where the agents' ability to hold-up values ex post obstruct the implementation of optimal RPE schemes. The principal can take actions to constrain the agents' hold-up power by limiting their outside options and by protecting property rights, but once these actions are costly, a trade-off between incentive provision and agent control appears. The model contributes to the theory of the firm. It indicates why firms, not agents, own assets, and why peer-dependent incentive systems are more common within than between firms.

Keywords: Relational contracts; multiagent moral hazard; endogenous hold-up (search for similar items in EconPapers)
JEL-codes: D23 J33 L14 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2007-11-30
New Economics Papers: this item is included in nep-bec
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Related works:
Chapter: Relative Performance Evaluation, Agent Hold-up and Firm Organization (2008)
Journal Article: Relative performance evaluation, agent hold-up and firm organization (2008)
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