Relational Incentive Contracts and Performance Measurement

Incentive Contracts and Performance Measurement

Relational Incentive Contracts

Standard incentive theory models provide a rich framework for studying informational problems but assume that contracts can be perfectly enforced. This paper studies the design of self-enforced relational contracts. I show that optimal contracts often can take a simple stationary form, but that self-enforcement restricts promised compensation and affects incentive provision. With hidden informa...

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...

Relational Incentive Contracts with Private Information

This paper extends Levin’s (2003) relational contract model by having not only the agent’s cost of effort (agent’s type), but also the value of that effort to the principal (principal’s type) subject to i.i.d. shocks. When optimal effort is fully pooled across agent types for multiple principal types, it is also pooled across those principal types. When optimal effort separates some agent types...

Incentive Contracts and Environmental Performance Indicators

A principal-agent (P-A) model is used to analyse the effect of environmental performance indicators (EPI) on environmental risk sharing within the firm. To achieve due diligence, the principal (top management), having to use imperfect performance indicators and fearing penalties for environmental damages, wants to avoid environmental harm and induce the agent (employee manipulating hazardous ma...