Renegotiation and Relative Performance Evaluation: Why an Informative Signal may be Useless

Andrew Yim

MPRA Paper from University Library of Munich, Germany

Abstract: Although Holmstrom’s informativeness criterion provides a theoretical foundation for the controllability principle and interfirm relative performance evaluation, empirical and field studies provide only weak evidence on such practices. This paper refines the traditional informativeness criterion by abandoning the conventional full-commitment assumption. With the possibility of renegotiation, a signal’s usefulness in incentive contracting depends on its information quality, not simply on whether the signal is informative. This paper derives conditions for determining when a signal is useless and when it is useful. In particular, these conditions will be met when the signal’s information quality is either sufficiently poor or sufficiently rich. (JEL C72, D82).

Keywords: informativeness; monitoring; renegotiation; principal-agent model (search for similar items in EconPapers)
JEL-codes: C72 D82 M21 M41 (search for similar items in EconPapers)
Date: 2000-10-28
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Published in Review of Accounting Studies 1.6(2001): pp. 77-108

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:27855

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