Performance Measurement in Agency Models
28 Pages Posted: 28 Feb 2019
Date Written: February 25, 2019
This note explores how to evaluate an agent’s performance in standard incentive contracts. We show that the MPS criterion proposed by Kim (1995) becomes a tight condition for one performance measurement system to be more informative than another, as long as the first-order approach can be justified. In the one-signal case obeying the monotone likelihood ratio property, the MPS criterion is equivalent to the way of ordering signals developed by Lehmann (1988), establishing a link to statistical decision theory. Our results demonstrate that depending on the agent’s potential deviations, ideal performance measures can be different.
Keywords: agency problems, performance measurement, informativeness criterion, signal orderings
JEL Classification: D86
Suggested Citation: Suggested Citation