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Relational contracts with subjective peer evaluations

Deb, Joyee, Li, Jin and Mukherjee, Arijit (2016) Relational contracts with subjective peer evaluations. RAND Journal of Economics, 47 (1). pp. 3-28. ISSN 0741-6261

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Identification Number: 10.1111/1756-2171.12116

Abstract

We study optimal dynamic contracting for a firm with multiple workers where compensation is based on public performance signals and privately reported peer evaluations. We show that if evaluation and effort provision are done by different workers (e.g., consider supervisor-agent hierarchy), first-best can be achieved even in a static setting. However, if each worker both exerts effort and reports peer evaluations (e.g., consider team setting), effort incentives cannot be decoupled from truth-telling incentives. This makes the optimal static contract inefficient. Relational contracts based on public signals increase efficiency. Interestingly, the optimal contract may ignore signals that are informative about effort.

Item Type: Article
Official URL: http://onlinelibrary.wiley.com/journal/10.1111/(IS...
Divisions: Management
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
Sets: Departments > Management
Date Deposited: 10 Oct 2017 10:15
Last Modified: 20 Jul 2019 02:22
URI: http://eprints.lse.ac.uk/id/eprint/84533

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