Performance Measurement in Agency Models

28 Pages Posted: 28 Feb 2019

See all articles by Chang-Koo Chi

Chang-Koo Chi

Norwegian School of Economics (NHH) - Department of Economics

Kyoung Jin Choi

University of Calgary - Haskayne School of Business

Date Written: February 25, 2019

Abstract

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

Chi, Chang-Koo and Choi, Kyoung Jin, Performance Measurement in Agency Models (February 25, 2019). NHH Dept. of Economics Discussion Paper No. 5/2019. Available at SSRN: https://ssrn.com/abstract=3343484 or http://dx.doi.org/10.2139/ssrn.3343484

Chang-Koo Chi (Contact Author)

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

Helleveien 30
N-5035 Bergen
Norway

Kyoung Jin Choi

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

HOME PAGE: http://sites.google.com/site/kyoungjinchoiecon/

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