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Relational Incentive Contracts and Performance Measurement

Chang Koo Chi () and Trond Olsen ()

No 2018/6, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

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: D00 D20 D21 D80 D86 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2018-04-30
New Economics Papers: this item is included in nep-cta, nep-hrm and nep-mic
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http://hdl.handle.net/11250/2496783 Full text (application/pdf)

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Working Paper: Relational Incentive Contracts and Performance Measurement (2018) Downloads
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