Agent Employment Horizons and Contracting Demand for Forward-Looking Performance Measures
Posted: 26 Jan 2002
In this paper, the principal rewards an agent's farsighted effort both in the short- and long-term, with the short-term reward based on a noisy, forward-looking performance measure and the long-term reward based on a potentially less noisy, trailing performance measure. The main result is that optimal contracting weights depend on the agent's employment time horizon: the shorter the agent's employment horizon the greater the emphasis on the forward-looking performance measure and vice versa. This implies that contracting on forward-looking performance measures can be valuable in mitigating any adverse long-term effects of employees myopically focusing on short-term trailing performance measures.
Keywords: Performance measures; Incentive contracts; Agency theory; Time horizons
JEL Classification: J33, J41, M41, M46
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