Subjective Performance Evaluation and Collusion

Veikko Thiele

MPRA Paper from University Library of Munich, Germany

Abstract: This paper considers a principal-agent relationship and explores the incentive provision when the agent's performance cannot be verified. It contrasts two alternatives for the principal to provide incentives: (i) to subjectively evaluate the agent's performance; and (ii), to delegate this task to a supervisor. Supervision induces contractible information about the agent's performance, but could result in vertical collusion. This paper demonstrates that collusion-proofness can require an inefficiently high payment to the supervisor, and too low powered incentives for the agent. The eventuality of collusion is further found to potentially (i), improve the profitability; and (ii), facilitate the achievement of relational contracts based upon subjective performance evaluations.

Keywords: Subjective performance measurement; collusion; relational contracts; limited liability; incentives (search for similar items in EconPapers)
JEL-codes: D82 D86 (search for similar items in EconPapers)
Date: 2007-03-31
New Economics Papers: this item is included in nep-bec
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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https://mpra.ub.uni-muenchen.de/8327/1/MPRA_paper_8327.pdf revised version (application/pdf)

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