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Discretionary Bonuses as a Feedback Mechanism

Author

Listed:
  • Anton Suvorov

    (CEFIR and New Economic School)

  • Jeroen van de Ven

    (University of Amsterdam and Utrecht School of Economics)

Abstract
This paper studies the use of discretionary rewards in a finitely repeated principal-agent relationship with moral hazard. We show that the principal, when she obtains a private subjective signal about the agent’s performance, may pay discretionary bonuses to provide credible feedback to the agent. Conistent with the often observed compression of ratings, we show that in equilibrium the principal communicates the agent’s interim performance imperfectly, i.e. she does not fully di?erentiate good and bad performance. Furthermore, we show that small rewards can have a large impact on the agent’s effort provided that the principal’s stake in the project is small. Our analysis further reveals that, also in accordance with the empirical findings, the principal may ex ante prefer to choose a ’smoky’, rather than a fully transparent performance monitoring system, thereby acquiring an implicit commitment device to reward the agent through discretionary bonuses.

Suggested Citation

  • Anton Suvorov & Jeroen van de Ven, 2006. "Discretionary Bonuses as a Feedback Mechanism," Working Papers w0088, Center for Economic and Financial Research (CEFIR).
    • Handle: RePEc:cfr:cefirw:w0088
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    File URL: http://www.cefir.ru/papers/WP88Suvorov.pdf
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    References listed on IDEAS

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    Cited by:

    1. Jean Tirole & Roland Bénabou, 2006. "Incentives and Prosocial Behavior," American Economic Review, American Economic Association, vol. 96(5), pages 1652-1678, December.
    2. Neckermann, Susanne & Cueni, Reto & Frey, Bruno S., 2014. "Awards at work," Labour Economics, Elsevier, vol. 31(C), pages 205-217.
    3. Susanne Neckermann & Reto Cueni & Bruno S. Frey, 2009. "What is an Award Worth? An Econometric Assessment of the Impact of Awards on Employee Performance," CESifo Working Paper Series 2657, CESifo.
    4. Van den Steen, Eric, 2005. "Too Motivated?," Working papers 18180, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    5. Bruno S. Frey & Susanne Neckermann, 2008. "Awards: Questioning Popular Notions," CREMA Working Paper Series 2008-14, Center for Research in Economics, Management and the Arts (CREMA).

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    More about this item

    Keywords

    discretionary rewards; feedback; self confidence; subjective performance; moral hazard; monitoring system;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M50 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - General

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