Stochastic Contracts and Subjective Evaluations

Matthias Lang

No 329, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: Subjective evaluations are widely used, but call for different contracts from classical moral-hazard settings. Previous literature shows that contracts require payments to third parties. I show that the (implicit) assumption of deterministic contracts makes payments to third parties necessary. This paper studies incentive contracts with stochastic compensation, like payments in stock options or uncertain arbitration procedures. These contracts incentivize employees without the need for payments to third parties. In addition, stochastic contracts can be more efficient and can make the principal better off compared to deterministic contracts. My results also address the puzzle about the prevalence of labor contracts with stochastic compensation.

Keywords: subjective evaluations; stochastic contracts; stochastic compensation; budget-balanced contracts; moral hazard; subjective performance measures; incentives (search for similar items in EconPapers)
JEL-codes: D80 J33 J41 J70 (search for similar items in EconPapers)
Date: 2022-05-18
New Economics Papers: this item is included in nep-hrm and nep-mic
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Related works:
Journal Article: Stochastic contracts and subjective evaluations (2023)
Working Paper: Stochastic Contracts and Subjective Evaluations (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:rco:dpaper:329

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