Subjective evaluation, ambiguity and relational contracts

Brigitte Godbillon-Camus ()
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Brigitte Godbillon-Camus: Laboratoire de Recherche en Gestion et Economie, Institut d'Etudes Politiques, Strasbourg

Working Papers of LaRGE Research Center from Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg

Abstract: The current theoretical literature on contracts with compensation system based on subjective performance measures (Prendergast [1999]) which deals with the principal-agent relationship with moral hazard, assumes that these measures have the advantage of giving a more comprehensive view of the agent's performance but the disadvantage of being impossible to verify by a third party. However, the vagueness of the subjective evaluations is not considered. This paper introduces therefore this characteristic of the subjective performance measure of being vague for the agent. To formalize this vagueness, we add to the basic agency model the assumption that there are several signals available as subjective measure and that the agent does not receive enough information to form a unique prior on the set of signals. Hence the agent has ambiguous beliefs on principal's reference signal. We show then that the efficiency and credibility properties of the combination of formal and relational contracts, with the formal contract based on objective evaluations and the relational contract based on subjective evaluations, are no longer satisfied and depend on the agent’s behavior with regard to ambiguity.

Keywords: Ambiguity; moral hazard; relational contract; subjective evaluation. (search for similar items in EconPapers)
JEL-codes: D81 D82 J33 (search for similar items in EconPapers)
Date: 2003
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