Renegotiation and Relative Performance Evaluation: Why an Informative Signal May Be Useless
39 Pages Posted: 11 Aug 1999 Last revised: 27 Apr 2010
Date Written: October 28, 2000
Although Holmstrom's informativeness criterion provides a theoretical foundation for the controllability principle and interfirm relative performance evaluation, empirical and field studies provide only weak evidence on such practices. This paper refines the traditional informativeness criterion by abandoning the conventional full-commitment assumption. With the possibility of renegotiation, a signal's usefulness in incentive contracting depends on its information quality, not simply on whether the signal is informative. This paper derives conditions for determining when a signal is useless and when it is useful. In particular, these conditions will be met when the signal's information quality is either sufficiently poor or sufficiently rich.
Keywords: Informativeness, monitoring, renegotiation, principal-agent model
JEL Classification: C72, D82, M40, M46, J33
Suggested Citation: Suggested Citation