Scandinavian Working Papers in Economics

Discussion Paper Series in Economics,
Norwegian School of Economics, Department of Economics

No 5/2019: Performance Measurement in Agency Models

Chang Koo Chi () and Kyoung Jin Choi ()
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Chang Koo Chi: Dept. of Economics, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Economics, Helleveien 30, N-5045 Bergen, Norway
Kyoung Jin Choi: University of Calgary

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.

Keywords: Agency problems; performance measurement; informativeness criterion; signal orderings

JEL-codes: D86

22 pages, February 25, 2019

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