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Optimal Performance Metrics

In: Contract Theory: Discrete- and Continuous-Time Models

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  • Jaeyoung Sung

    (Ajou University)

Abstract

We study the use of a signal process in continuous-time contracting. The usefulness of the signal depends on the way that the signal is related to the agent’s performanceOptimal performance metric Second best, risk-based continuous time optimal performance metrics outcome, in terms of information content and correlation. We discuss various cases for useful signals. A signal can be useless if it has zero information content about the agent’s effort and if it is conditionally independent of the outcome. However, even when it has zero information content, and if it is (positively or negatively) correlated with the outcome, the signal can be useful in contracting in that it can help reduce the compensation risk. In general, the signal process can positively affect the construction of the optimal performance metric not only by helping improve the information content, but by helping reduce the compensation risk. We also discuss the concept of the relative performance evaluation (RPE)Relative performance evaluation (RPE) and its role (sometimes its irrelevance) in the presence of financial markets.

Suggested Citation

  • Jaeyoung Sung, 2023. "Optimal Performance Metrics," Springer Books, in: Contract Theory: Discrete- and Continuous-Time Models, chapter 0, pages 99-111, Springer.
    • Handle: RePEc:spr:sprchp:978-981-99-5487-2_6
    DOI: 10.1007/978-981-99-5487-2_6
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