Subjective Performance Measures in Optimal Incentive Contracts

Subjective Performance Measures in Optimal Incentive Contracts*

Incentive contracts often include important subjective components that mitigate incentive distortions caused by imperfect objective measures. This paper explores the combined use of subjective and objective performance measures in (respectively) implicit and explicit incentive contracts. We show that the presence of sufficiently effective explicit contracts can render all implicit contracts inf...

Optimal Incentive Contracts for Experts

This paper analyzes optimal incentive contracts for information acquisition and revelation. A decision maker faces the problem to design a contract that provides an expert with incentives to acquire and reveal information. We show that it is in general not optimal to reward the expert if his recommendation is confirmed. The common observation that experts are paid when their recommendation is c...

Incentive Contracts and Performance Measurement

Optimal Incentive Contracts and Information Cascades

We examine information aggregation regarding industry capital productivity from privately informed managers in a dynamic model with optimal incentive contracts. Information cascades always occur if managers enjoy limited liability: when beliefs regarding productivity become endogenously extreme (optimistic or pessimistic), learning stops. There is no learning if initial beliefs are extreme, or ...

Optimal incentive contracts under inequity aversion

Optimal Incentive Contracts under Inequity Aversion We analyze the Moral Hazard problem, assuming that agents are inequity averse. Our results differ from conventional contract theory and are more in line with empirical findings than standard results. We find: First, inequity aversion alters the structure of optimal contracts. Second, there is a strong tendency towards linear sharing rules. Thi...