Bonus Payments versus Efficiency Wages in the Repeated Principal-Agent Model with Subjective Evaluations

Abstract

We study an infinitely repeated principal-agent model with subjective evaluations. We compare the surplus in efficiency-wage equilibria and in bonus-payments equilibria. The agent receives a constant wage and is motivated by the threat of dismissal in efficiency-wage equilibria. The agent receives a bonus and quits the relationship after disagreements between his self-evaluation and the principal's performance appraisal in bonus-payments equilibria. We construct a class of equilibria with bonus payments that approach efficiency as patience increases. In contrast, payoffs from efficiency-wage equilibria are bounded away from the Pareto-payoff frontier for any discount factor. (JEL D82, J33, J41)

17. What Do Managers Do? Exploring Persistent Performance Differences among Seemingly Similar Enterprises

“…Finally, cooperation can also collapse when there is private monitoring, such as in the subjective-evaluation agency models by Levin (2003), MacLeod (2003, Fuchs (2007), and Maestri (2012). A key insight of this literature is that there must be inefficiency on the equilibrium path: to provide incentives, the agent must do worse when outcomes are poor; but to induce truthful revelation of outcomes, the principal must be indifferent across alternative output reports.…”

Relational contracts with subjective peer evaluations

“…The early contributions in this literature typically assume a public but nonverifiable performance signal and highlight how repeated interaction may alleviate moral hazard even in the absence of court‐enforceable contracts (see Malcomson, 2013, for a survey). More recently, some authors have focused on private or subjective evaluations (Levin, ; MacLeod, ; Fuchs, ; Chan and Zheng, ; Maestri, ), though most consider a single‐worker framework and eschew the question of eliciting the truthful evaluation from the coworkers.…”

Relational Contracts with Subjective Peer Evaluations

“…The early contributions in this literature typically assume a public but nonverifiable performance signal and highlight how repeated interaction may alleviate moral hazard even in the absence of court-enforceable contracts (see Malcomson, 2013, for a survey). More recently, some authors have focused on private or subjective evaluations (Levin, 2003;MacLeod, 2003;Fuchs, 2007;Chan and Zheng, 2011;Maestri, 2012), though most consider a single-worker framework and eschew the question of eliciting the truthful evaluation from the coworkers.…”