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It is well known that comparative performance information can enhance efficiency in static principal-agent relationships by improving the trade-off between insurance and incentives in the design of explicit contracts. In dynamic settings, however, there may be implicit as well as explicit incentives, for example, managerial career concerns and the ratchet effect in regulation. In Discussion Paper No. 1107, Research Fellow Margaret Meyer and John Vickers begin by presenting two examples, which abstract from risk aversion and the design of explicit incentives, to show that the incentive effects of comparative performance information are ambiguous when implicit incentives are present. They next analyse a more general model that allows for explicit incentives within periods but limited precommitment between periods, risk aversion on the part of agents, and arbitrary degrees of bargaining power for agents.The authors conclude that in most agency relationships, it is unlikely that all incentives are provided through explicit contracts and that the principal faces information constraints. Constraints on the principal's powers of precommitment are also likely to be present. The authors suggest that in such settings, the consequences for efficiency of comparative performance information will not be confined to its risk-reduction benefits. Implicit incentives will be affected as well, and these dynamic effects, whatever their sign, are potentially of the same order of significance. Performance Comparisons and Dynamic Incentives Margaret A Meyer and John Vickers Discussion Paper No. 1107, January 1995 (IO) |
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