Delegating Performance Evaluation

University of Zurich, Department of Economics, Working Paper No. 266, Revised version

66 Pages Posted: 26 Oct 2017 Last revised: 6 Nov 2018

See all articles by Igor Letina

Igor Letina

University of Bern - Department of Economics

Shuo Liu

Peking University - Guanghua School of Management

Nick Netzer

University of Zurich

Date Written: November 2018

Abstract

We study optimal incentive contracts with multiple agents when performance evaluation is delegated to a reviewer. The reviewer may be biased in favor of the agents, but the degree of bias is unknown to the principal. We show that a contest, which is a contract in which the principal determines a set of prizes to be allocated to the agents, is optimal. By using a contest, the principal can commit to sustaining incentives despite the reviewer's potential leniency bias. The optimal effort profile can be uniquely implemented by an all-pay auction with a cap. Our analysis has implications for applications as diverse as the design of worker compensation, the awarding of research grants, and the allocation of foreign aid.

Keywords: Performance evaluation, delegation, optimality of contests

JEL Classification: D02, D82, M52

Suggested Citation

Letina, Igor and Liu, Shuo and Netzer, Nick, Delegating Performance Evaluation (November 2018). University of Zurich, Department of Economics, Working Paper No. 266, Revised version, Available at SSRN: https://ssrn.com/abstract=3059593 or http://dx.doi.org/10.2139/ssrn.3059593

Igor Letina (Contact Author)

University of Bern - Department of Economics ( email )

Schanzeneckstrasse 1
Bern, CH-3001
Switzerland

Shuo Liu

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Nick Netzer

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

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