The Performance Measurement Trap

This paper investigates the e ect of performance measurement on the optimal e ort allocation by salespeople when rms are concerned about retention of salespeople with higher abilities. It shows that introducing salespeople performance measurement may result in productivity, pro t, and welfare losses when all market participants optimally respond to the expected information provided by the measurement and the (ex-post) optimal retention e orts of the rm cannot be (ex-ante) contractually prohibited. In other words, the dynamic inconsistency of the management problems of inducing the desired e ort allocation by the salespeople and the subsequent rm's objective to retain high ability salespeople may result in performance measurement yielding an inferior outcome.