Specific knowledge and performance measurement

Michael Raith

133 citations0/0 files storedThe RAND Journal of Economics

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Accounting and Organizational Management Corporate Finance and Governance Law, Economics, and Judicial Systems

Abstract

I examine optimal incentives and performance measurement in a model where an agent has specific knowledge (in the sense of Jensen and Meckling) about the consequences of his actions for the principal. Contracts can be based both on “input” measures related to the agent's actions and an “output” measure related to the principal's payoff. Whereas input‐based pay minimizes income risk, only output‐based pay encourages the agent to use his knowledge efficiently. In general, it is optimal to use both kinds of performance measures. The results help to explain some empirical puzzles and lead to several new predictions.

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References

1979Moral Hazard and Observability 1996The Use of Knowledge in Society 1985The Structure of Corporate Ownership: Causes and Consequences 1991Multitask Principal–Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design 1982Moral Hazard in Teams 1999Corporate governance, chief executive officer compensation, and firm performance 1992The investment opportunity set and corporate financing, dividend, and compensation policies 1999The Provision of Incentives in Firms

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