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Distorted Performance Measures and Dynamic Incentives
Author(s) -
Kaarbøe Oddvar M.,
Olsen Trond E.
Publication year - 2008
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1530-9134.2008.00174.x
Subject(s) - incentive , ratchet effect , distortion (music) , ratchet , promotion (chess) , microeconomics , economics , computer science , political science , amplifier , computer network , management , bandwidth (computing) , politics , chaotic , law
Incentive contracts must typically be based on performance measures that do not exactly match the agents' true contribution to the principals' objectives. Such misalignment may pose difficulties for effective incentive design. We analyze the extent to which implicit dynamic incentives, such as career concerns and ratchet effects, alleviate or aggfravate these problems. Our analysis demonstrates that the interplay between distorted performance measures and implicit incentives implies that career and ratchet effects have real effects in that stronger ratchet effects or greater distortion may increase optimal monetary incentives, and that distortion affects the optimality of different promotion rules.