Relational Incentive Contracts and Performance Measurement

35 Pages Posted: 7 May 2018 Last revised: 19 Mar 2019

See all articles by Chang-Koo Chi

Chang-Koo Chi

Norwegian School of Economics (NHH) - Department of Economics

Trond E. Olsen

Norwegian School of Economics (NHH) - Department of Business and Management Science; CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: January 16, 2019

Abstract

This paper analyzes relational contracts under moral hazard. We first show that if the available information (signal) about effort satisfies a generalized monotone likelihood ratio property, then irrespective of whether the first-order approach (FOA) is valid or not, the optimal bonus scheme takes a simple form. The scheme rewards the agent a fixed bonus if his performance index xceeds a threshold, like the FOA contract of Levin (2003), but the threshold can be set differently. We next derive a sufficient and necessary condition for non-verifiable information to improve a relational contract. Our new informativeness criterion sheds light on the nature of an ideal performance measure in relational contracting.

Keywords: Relational contracts, non-verifiable performance measures, first-order approach,

Suggested Citation

Chi, Chang-Koo and Olsen, Trond E., Relational Incentive Contracts and Performance Measurement (January 16, 2019). NHH Dept. of Economics Discussion Paper No. 07/2018, Available at SSRN: https://ssrn.com/abstract=3167697 or http://dx.doi.org/10.2139/ssrn.3167697

Chang-Koo Chi (Contact Author)

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway

Trond E. Olsen

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
N-5045 Bergen
Norway
+47 55 95 99 76 (Phone)
+47 55 95 96 50 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

HOME PAGE: http://www.cesifo.de

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