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Distorted performance measures and dynamic incentives

Kaarbøe, Oddvar M.; Olsen, Trond E.
Working paper
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URI
http://hdl.handle.net/11250/163733
Date
2004-12
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  • Discussion papers (FOR) [531]
Abstract
Incentive contracts must typically be based on performance measures that do not exactly match agents' true contribution to principals' objectives. Such misalignment may impose difficulties for effective incentive design. We analyze to what extent implicit dynamic incentives such as career concerns and ratchet effects alleviate or aggravate these problems. Our analysis demonstrates that the interplay between distorted performance measures and implicit incentives implies that career and ratchet effects have real effects, that career and monetary incentives may be complements, and that stronger ratchet effects or more distortion may increase optimal monetary incentives.
Publisher
Norwegian School of Economics and Business Administration. Department of Finance and Management Science
Series
Discussion paper
2004:21

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