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The Ignored Performance Measure

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  • Volker Laux

Abstract

This paper studies a setting in which a risk‐averse agent must be motivated to work on two tasks: evaluating a potential project and, if the project is adopted, implementing it. Although a performance measure that is informative of an agent's action is typically valuable because it can be used to improve the risk sharing of the contract, this is not necessarily the case in this two‐task setting. I provide a sufficient condition under which a performance measure that is informative of the agent's implementation effort is worthless for contracting despite the agent being risk averse. This shows that information content is a necessary but not a sufficient condition for a performance measure to be valuable.

Suggested Citation

  • Volker Laux, 2006. "The Ignored Performance Measure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(3), pages 707-733, September.
    • Handle: RePEc:bla:jemstr:v:15:y:2006:i:3:p:707-733
    DOI: 10.1111/j.1530-9134.2006.00115.x
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    References listed on IDEAS

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    1. Richard A. Lambert, 1986. "Executive Effort and Selection of Risky Projects," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 77-88, Spring.
    2. Melumad, Nd & Reichelstein, S, 1987. "Centralization Versus Delegation And The Value Of Communication," Journal of Accounting Research, Wiley Blackwell, vol. 25, pages 1-21.
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    Cited by:

    1. Xiaojing Meng & Jie Joyce Tian, 2020. "Board Expertise and Executive Incentives," Management Science, INFORMS, vol. 66(11), pages 5448-5464, November.

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