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on Contract Theory and Applications |
| By: | Ola Kvaløy; Trond E. Olsen |
| Abstract: | Reward systems based on balanced scorecards typically connect pay to an index, i.e. a weighted sum of multiple performance measures. We show that such an index contract may indeed be optimal if performance measures are non-verifiable so that the contracting parties must rely on self-enforcement. Under commonly invoked assumptions (including normally distributed measurements), the optimal self-enforcing (relational) contract between a principal and a multitasking agent is an index contract where the agent gets a bonus if a weighted sum of per-formance outcomes on the various tasks (the index) exceeds a hurdle. The weights reflect a trade-off between distortion and precision for the measures. The efficiency of the contract improves with higher precision of the index measure, since this strengthens incentives. Correlations between measurements may for this reason be beneficial. For a similar reason, the principal may also want to include verifiable performance measures in the relational index contract in order to improve incentives. |
| Keywords: | incentives, performance measures, relational contracts |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8922&r=all |
| By: | Hiroshi Kitamura; Noriaki Matsushima; Misato Sato |
| Abstract: | We consider exclusive contracts as a survival strategy for a local incumbent manufacturer facing a multinational manufacturer's entry. Although both manufacturers prefer to trade with an efficient local distributor, trading with inefficient competitive distributors is acceptable only to the entrant, owing to the entrant's efficiency. Hence, such competitive distributors can be an outside option for the entrant. As the entrant becomes efficient, the outside option works effectively, implying that the entry does not considerably benefit the efficient local distributor. Thus, the local manufacturer is more likely to sign an exclusive contract with the efficient distributor as the entrant becomes efficient. |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:1122&r=all |
| By: | Jessica Martin (INSA Toulouse - Institut National des Sciences Appliquées - Toulouse - INSA - Institut National des Sciences Appliquées); Stéphane Villeneuve (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | What type of delegation contract should be offered when facing a risk of the magnitude of the pandemic we are currently experiencing and how does the likelihood of an exogenous early termination of the relationship modify the terms of a full-commitment contract? We study these questions by considering a dynamic principal-agent model that naturally extends the classical Holmström-Milgrom setting to include a risk of default whose origin is independent of the inherent agency problem. We obtain an explicit characterization of the optimal wage along with the optimal action provided by the agent. The optimal contract is linear by offering both a fixed share of the output which is similar to the standard shutdown-free Holmström-Milgrom model and a linear prevention mechanism that is proportional to the random lifetime of the contract. We then tweak the model to add a possibility for risk mitigation through investment and study its optimality. |
| Keywords: | Hamilton-Jacobi Bellman equations,Default risk,Principal-Agent problems |
| Date: | 2021–01–28 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03124102&r=all |
| By: | Erwin Bulte; John List; Daan van Soest |
| Abstract: | Incomplete contracts are the rule rather than the exception, and any incentive scheme faces the risk of improving performance on incented aspects of a task at the detriment of performance on non-incented aspects. Recent research documents the effect of loss-framed versus gain-framed incentives on incentivized behavior, but how do such incentives affect overall performance? We explore potential trade-offs by conducting field experiments in an artificial "workplace". We explore two types of incentive spillovers: those contemporaneous to the incented task and those subsequent to the incented task. We report three main results. First, consonant with the extant literature, a loss aversion incentive induces greater effort on the incented task. Second, offsetting this productivity gain, we find that the quality of work decreases if quality is not specified in the incentive contract. Third, we find no evidence of harmful spillover effects to subsequent tasks; if anything, the loss aversion incentive induces more effort in subsequent tasks. Taken together, our results highlight that measuring and accounting for incentive spillovers are important when considering their overall impact. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:feb:framed:00727&r=all |