Distorted Performance Measurement and Relational Contracts

Distorted performance measurement and relational contracts

This paper analyzes the use of alternative performance measures in an agency model in which contracting incorporates both formal and informal agreements. It is shown that under a proper use of verifiable and unverifiable performance measures, the two types of contracts are complements, regardless of the principal’s fallback position. The analysis therefore contrasts earlier results of the liter...

Incentive Contracts and Performance Measurement

IT Outsourcing Contracts and Performance Measurement

Companies that outsource information technology (IT) services usually focus on achieving multiple objectives. Correspondingly, outsourcing contracts typically specify a variety of metrics to measure and reward (or penalize) vendor performance. The specific types of performance metrics included in a contract strongly affect its incentive content and ultimately its outcome. One specific challenge...

Information and Relational Contracts

We investigate the use of information in repeated principal-agent game and report three results. First, consistent with Kandori (1992), garbling signals within each period hurts the e¢ ciency of the game. Second, contrary to Abreu, Milgrom, and Pearce (1991), bundling signals across periods and then fully revealing them never increases the e¢ ciency of the game. Third, and most importantly, we ...

Financing Constraints and Relational Contracts∗

We consider a model in which a principal must both repay a loan and motivate an agent to work hard. Output is non-contractible, so the principal faces a commitment problem with both her creditor and her agent. In a profit-maximizing equilibrium, the agent’s productivity is initially low and increases over time. Productivity continues increasing even after the debt has been repaid, eventually co...