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Performance Measurement in Agency Models

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Abstract

This note explores how to evaluate an agent’s performance in standard incentive contracts. We show that the MPS criterion proposed by Kim (1995) becomes a tight condition for one performance measurement system to be more informative than another, as long as the first-order approach can be justified. In the one-signal case obeying the monotone likelihood ratio property, the MPS criterion is equivalent to the way of ordering signals developed by Lehmann (1988), establishing a link to statistical decision theory. Our results demonstrate that depending on the agent’s potential deviations, ideal performance measures can be different.

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  • Koo Chi, Chang & Jin Choi, Kyoung, 2019. "Performance Measurement in Agency Models," Discussion Paper Series in Economics 5/2019, Norwegian School of Economics, Department of Economics.
    • Handle: RePEc:hhs:nhheco:2019_005
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    1. Bütikofer, Aline & Cronin, Christopher J. & Skira, Meghan M., 2020. "Employment effects of healthcare policy: Evidence from the 2007 FDA black box warning on antidepressants," Journal of Health Economics, Elsevier, vol. 73(C).
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    More about this item

    Keywords

    Agency problems; performance measurement; informativeness criterion; signal orderings;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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