Subjective Evaluation versus Public Information

Helmut Bester and Johannes Münster

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: This paper studies a principal-agent relation in which the principal's private information about the agent's effort choice is more accurate than a noisy public performance measure. For some contingencies the optimal contract has to specify ex post inefficiencies in the form of inefficient termination (firing the agent) or third-party payments (money burning). We show that money burning is the less efficient incentive device: it is used at most in addition to firing and only if the loss from termination is small. Under an optimal contract the agent's wage may depend only on the principal's report and not on the public signal. Nonetheless, public information is valuable as it facilitates truthful subjective evaluation by the principal.

Keywords: Subjective evaluation; moral hazard; termination clauses; third-party payments (search for similar items in EconPapers)
JEL-codes: D23 D82 D86 J41 M12 (search for similar items in EconPapers)
Date: 2013-05-24
New Economics Papers: this item is included in nep-cta, nep-hrm and nep-mic
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https://epub.ub.uni-muenchen.de/15340/1/399.pdf (application/pdf)

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Journal Article: Subjective evaluation versus public information (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:trf:wpaper:399

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