American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Optimal Contracting with Subjective Evaluation
American Economic Review
(pp. 216–240)
Abstract
This paper extends the standard principal-agent model to allow for subjective evaluation. The optimal contract results in more compressed pay relative to the case with verifiable performance measures. Moreover, discrimination against an individual implies lower pay and performance, suggesting that the extent of discrimination as measured after controlling for performance may underestimate the level of true discrimination. Finally, the optimal contract entails the use of bonus pay rather than the threat of dismissal, hence neither "efficiency wages" nor the right to dismiss an employee are necessary ingredients for an optimal incentive contract.Citation
Bentley MacLeod, W. 2003. "Optimal Contracting with Subjective Evaluation ." American Economic Review 93 (1): 216–240. DOI: 10.1257/000282803321455232JEL Classification
- D82 Asymmetric and Private Information; Mechanism Design
- J41 Labor Contracts
- J71 Labor Discrimination