Distorted Performance Measures and Dynamic Incentives

No 2004/21, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

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.

Keywords: Incentive contracts; Performance measures (search for similar items in EconPapers)
JEL-codes: J41 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2004-12-29
New Economics Papers: this item is included in nep-bec
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Related works:
Journal Article: Distorted Performance Measures and Dynamic Incentives (2008)
Working Paper: Distorted Performance Measures and Dynamic Incentives (2006)
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