Agent Employment Horizons and Contracting Demand for Forward‐Looking Performance Measures

Abstract

In this paper, the principal rewards an agent’s farsighted effort both in the short and long term, with the short‐term reward based on a noisy, forward‐looking performance measure and the long‐term reward based on a potentially less noisy, trailing performance measure. The main result is that optimal contracting weights depend on the agent’s employment time horizon: the shorter the agent’s employment horizon the greater the emphasis on the forward‐looking performance measure and vice versa. This implies that contracting on forward‐looking performance measures can be valuable in mitigating any adverse long‐term effects of employees myopically focusing on short‐term trailing performance measures.

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