Performance Measurement in Multi-Task Agencies

Abstract

This paper analyzes a multi-task agency relationship with a risk-neutral and financially constraint agent. The agent's performance evaluation is incongruent, i.e. it does not reflect his contribution to firm value, and thus motivates an inefficient effort allocation across tasks. This paper investigates the improvement of the agent's performance evaluation by contrasting two alternatives for the principal: (i) to invest in assets which can be utilized to generate additional measures about the agent's performance; and (ii) to delegate this task to a supervisor. This paper demonstrates that delegation is superior whenever the costless available performance evaluation is sufficiently incongruent.

Keywords: multi-task agencies, performance measurement, distortion, congruity, limited liability, incentives

JEL Classification: D23, D82, M52