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The efficiency of bonus-or-terminate incentive schemes under subjective evaluations

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  • Maestri, Lucas

Abstract

We study a repeated principal–agent model with subjective evaluations. We construct simple bonus-or-terminate incentive schemes. In these schemes, the principal evaluates the agent every T periods. The principal pays a bonus and asks the agent to work for T more periods if the evaluation is positive. The relationship is terminated if the evaluation is negative. The inefficiencies in these schemes vanish as the agent can be more frequently evaluated. This result holds generally under objective or subjective evaluations.

Suggested Citation

  • Maestri, Lucas, 2014. "The efficiency of bonus-or-terminate incentive schemes under subjective evaluations," Games and Economic Behavior, Elsevier, vol. 87(C), pages 412-418.
    • Handle: RePEc:eee:gamebe:v:87:y:2014:i:c:p:412-418
    DOI: 10.1016/j.geb.2014.05.015
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    References listed on IDEAS

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    1. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    2. Ely, Jeffrey C. & Valimaki, Juuso, 2002. "A Robust Folk Theorem for the Prisoner's Dilemma," Journal of Economic Theory, Elsevier, vol. 102(1), pages 84-105, January.
    3. Lucas Maestri, 2012. "Bonus Payments versus Efficiency Wages in the Repeated Principal-Agent Model with Subjective Evaluations," American Economic Journal: Microeconomics, American Economic Association, vol. 4(3), pages 34-56, August.
    4. Bentley W. MacLeod, 2003. "Optimal Contracting with Subjective Evaluation," American Economic Review, American Economic Association, vol. 93(1), pages 216-240, March.
    5. William Fuchs, 2007. "Contracting with Repeated Moral Hazard and Private Evaluations," American Economic Review, American Economic Association, vol. 97(4), pages 1432-1448, September.
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    7. Radner, Roy, 1985. "Repeated Principal-Agent Games with Discounting," Econometrica, Econometric Society, vol. 53(5), pages 1173-1198, September.
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    Cited by:

    1. William Fuchs, 2015. "Subjective Evaluations: Discretionary Bonuses and Feedback Credibility," American Economic Journal: Microeconomics, American Economic Association, vol. 7(1), pages 99-108, February.

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    More about this item

    Keywords

    Principal–agent model; Subjective evaluations;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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