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Money burning in subjective evaluation and limited liability: A case for pay for performance

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  • Bag, Parimal K.
  • Qian, Neng

Abstract

Research on subjective evaluation in principal–agent models have shown that the optimal contract should give uniform reward with zero money burning at all but the worst performance. In a static game involving two independent tasks with only high or low output possible, it is shown that when the agent is subjected to limited liability the optimal contract is more likely to exhibit ‘pay for performance’: full money burning if both tasks yield low outputs, partial money burning for mixed performance of low and high outputs, and zero money burning following high output in both tasks.

Suggested Citation

  • Bag, Parimal K. & Qian, Neng, 2019. "Money burning in subjective evaluation and limited liability: A case for pay for performance," Economics Letters, Elsevier, vol. 174(C), pages 208-213.
    • Handle: RePEc:eee:ecolet:v:174:y:2019:i:c:p:208-213
    DOI: 10.1016/j.econlet.2018.11.016
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    References listed on IDEAS

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    1. Jonathan Levin, 2003. "Relational Incentive Contracts," American Economic Review, American Economic Association, vol. 93(3), pages 835-857, June.
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    5. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
    6. Harris, Milton & Raviv, Artur, 1979. "Optimal incentive contracts with imperfect information," Journal of Economic Theory, Elsevier, vol. 20(2), pages 231-259, April.
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