Discussion paper

DP17312 Robust relational contracts with subjective performance evaluation

We study a repeated principal-agent model with transferable utility, where
the principal's evaluation of the agent's performance is subjective.
Consequently, monitoring is noisy and private. We focus on equilibria that
are robust to small payoff shocks. Existing constructions to support effort
fail to be equilibria in the presence of payoff shocks -- there is no
equilibrium where the agent always exerts effort on the equilibrium path.
Allowing the principal and agent to make simultaneous cheap-talk
announcements at the end of each period makes some effort sustainable in a
purifiable equilibrium. Payoffs arbitrarily close to fully efficient ones can be
achieved in equilibrium if players are sufficiently patient. In contrast to
earlier constructions, bonus targets are non-trivial and employee
self-evaluation is critical.


Bhaskar, V, W Olszewski and T Wiseman (2022), ‘DP17312 Robust relational contracts with subjective performance evaluation‘, CEPR Discussion Paper No. 17312. CEPR Press, Paris & London. https://cepr.org/publications/dp17312