Discussion Papers, Department of Finance and Management Science, Norwegian School of Economics (NHH)
No 2007/26:
Relative Performance Evaluation, Agent Hold-Up and Firm Organization
Ola Kvaløy ()
and Trond E. Olsen ()
Abstract: We analyze a situation where common noise makes
compensation based on relative performance evaluation (RPE) desirable, but
where the agents' ability to hold-up values ex post obstruct the
implementation of optimal RPE schemes. The principal can take actions to
constrain the agents' hold-up power by limiting their outside options and
by protecting property rights, but once these actions are costly, a
trade-off between incentive provision and agent control appears. The model
contributes to the theory of the firm. It indicates why firms, not agents,
own assets, and why peer-dependent incentive systems are more common within
than between firms.
Keywords: Relational contracts; multiagent moral hazard; endogenous hold-up; (follow links to similar papers)
JEL-Codes: D23; J33; L14; (follow links to similar papers)
23 pages, November 30, 2007
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