Subjective Evaluation versus Public Information

Bester, Helmut and Münster, Johannes (24. May 2013): Subjective Evaluation versus Public Information. SFB/TR 15 Discussion Paper No. 399

Abstract

This paper studies a principal-agent relation in which the principal's private information about the agent's effort choice is more accurate than a noisy public performance measure. For some contingencies the optimal contract has to specify ex post inefficiencies in the form of inefficient termination (firing the agent) or third-party payments (money burning). We show that money burning is the less efficient incentive device: it is used at most in addition to firing and only if the loss from termination is small. Under an optimal contract the agent's wage may depend only on the principal's report and not on the public signal. Nonetheless, public information is valuable as it facilitates truthful subjective evaluation by the principal.

• Item Type: Paper
• Form of publication: Preprint
• Keywords: Subjective evaluation, moral hazard, termination clauses, third-party payments
• Faculties: Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems; Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > A1 - Allokationsmechanismen in Organisationen und Märkten
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: D23, D82, D86, J41, M12
• Language: English