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Renegotiation and Relative Performance Evaluation: Why an Informative Signal may be Useless

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  • Yim, Andrew

Abstract

Although Holmstrom’s informativeness criterion provides a theoretical foundation for the controllability principle and interfirm relative performance evaluation, empirical and field studies provide only weak evidence on such practices. This paper refines the traditional informativeness criterion by abandoning the conventional full-commitment assumption. With the possibility of renegotiation, a signal’s usefulness in incentive contracting depends on its information quality, not simply on whether the signal is informative. This paper derives conditions for determining when a signal is useless and when it is useful. In particular, these conditions will be met when the signal’s information quality is either sufficiently poor or sufficiently rich. (JEL C72, D82).

Suggested Citation

  • Yim, Andrew, 2000. "Renegotiation and Relative Performance Evaluation: Why an Informative Signal may be Useless," MPRA Paper 27855, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:27855
    as

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    References listed on IDEAS

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    7. Demski, JS & Frimor, H, 1999. "Performance measure garbling under renegotiation in multiperiod agencies," Journal of Accounting Research, Wiley Blackwell, vol. 37, pages 187-214.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    informativeness; monitoring; renegotiation; principal-agent model;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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