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Delegating performance evaluation


Letina, Igor; Liu, Shuo; Netzer, Nick (2018). Delegating performance evaluation. Working paper series / Department of Economics 266, University of Zurich.

Abstract

We study optimal incentive contracts with multiple agents when performance evaluation is delegated to a reviewer. The reviewer may be biased in favor of the agents, but the degree of bias is unknown to the principal. We show that a contest, which is a contract in which the principal determines a set of prizes to be allocated to the agents, is optimal. By using a contest, the principal can commit to sustaining incentives despite the reviewer’s potential leniency bias. The optimal effort profile can be uniquely implemented by an all-pay auction with a cap. Our analysis has implications for applications as diverse as the design of worker compensation, the awarding of research grants, and the allocation of foreign aid.

Abstract

We study optimal incentive contracts with multiple agents when performance evaluation is delegated to a reviewer. The reviewer may be biased in favor of the agents, but the degree of bias is unknown to the principal. We show that a contest, which is a contract in which the principal determines a set of prizes to be allocated to the agents, is optimal. By using a contest, the principal can commit to sustaining incentives despite the reviewer’s potential leniency bias. The optimal effort profile can be uniquely implemented by an all-pay auction with a cap. Our analysis has implications for applications as diverse as the design of worker compensation, the awarding of research grants, and the allocation of foreign aid.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:D02, D82, M52
Uncontrolled Keywords:Performance evaluation, delegation, optimality of contests
Language:English
Date:March 2018
Deposited On:31 Oct 2017 10:03
Last Modified:29 Jul 2018 05:43
Series Name:Working paper series / Department of Economics
Number of Pages:76
ISSN:1664-7041
Additional Information:Revised version
OA Status:Green
Official URL:http://www.econ.uzh.ch/static/wp/econwp266.pdf
Related URLs:http://www.econ.uzh.ch/static/workingpapers.php

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