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Relative performance or team evaluation? Optimal contracts for other-regarding agents


Bartling, Björn (2011). Relative performance or team evaluation? Optimal contracts for other-regarding agents. Journal of Economic Behavior & Organization, 79(3):183-193.

Abstract

This paper derives optimal incentive contracts for agents with other-regarding preferences. It offers a behavioral explanation for the empirically observed lack of relative performance evaluation. We analyze a principal-multi agent model and assume that agents are inequity averse or status seeking. We show that team contracts can be optimal even if the agents’ performance measures are positively correlated such that relative performance evaluation would be optimal with purely self-interested agents and even though relative performance evaluation provides additional incentives to provide effort if agents have other-regarding preferences. Furthermore, optimal incentive contracts for other-regarding agents can be low-powered as compared to contracts for purely self-interested agents.

Abstract

This paper derives optimal incentive contracts for agents with other-regarding preferences. It offers a behavioral explanation for the empirically observed lack of relative performance evaluation. We analyze a principal-multi agent model and assume that agents are inequity averse or status seeking. We show that team contracts can be optimal even if the agents’ performance measures are positively correlated such that relative performance evaluation would be optimal with purely self-interested agents and even though relative performance evaluation provides additional incentives to provide effort if agents have other-regarding preferences. Furthermore, optimal incentive contracts for other-regarding agents can be low-powered as compared to contracts for purely self-interested agents.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:11 March 2011
Deposited On:16 Nov 2011 14:13
Last Modified:26 Jan 2017 08:50
Publisher:Elsevier
ISSN:0167-2681
Publisher DOI:https://doi.org/10.1016/j.jebo.2011.01.029
Other Identification Number:merlin-id:3986

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