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Performance Measurement and Information Production

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  • Christian Laux
  • Volker Laux

Abstract

When performance measures are used for evaluation purposes, agents have some incentives to learn how their actions affect these measures. We show that the use of imperfect performance measures can cause an agent to devote too many resources (too much effort) to acquiring information. Doing so can be costly to the principal, because the agent can use information to game the performance measure to the detriment of the principal. We analyze the effect of endogenous information acquisition on the optimal incentive strength and the quality of the performance measure used.

Suggested Citation

  • Christian Laux & Volker Laux, 2006. "Performance Measurement and Information Production," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(3), pages 412-423, September.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200609)162:3_412:pmaip_2.0.tx_2-h
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    References listed on IDEAS

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    3. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    4. Srikant Datar & Susan Cohen Kulp & Richard A. Lambert, 2001. "Balancing Performance Measures," Journal of Accounting Research, Wiley Blackwell, vol. 39(1), pages 75-92, June.
    5. Cremer, Jacques & Khalil, Fahad, 1992. "Gathering Information before Signing a Contract," American Economic Review, American Economic Association, vol. 82(3), pages 566-578, June.
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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