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Relational Incentive Contracts and Performance Measurement

Chi, Chang Koo; Olsen, Trond E.
Working paper
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URI
http://hdl.handle.net/11250/2496783
Date
2018-04-30
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  • Discussion papers (FOR) [556]
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 exceeds 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.
Publisher
FOR
Series
Discussion paper;6/18

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