Specific Knowledge and Performance Measurement

Posted: 4 Jul 2008

See all articles by Michael Raith

Michael Raith

University of Rochester - Simon Business School

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Abstract

I examine optimal incentives and performance measurement in a model where an agent has specific knowledge (in the sense of Jensen and Meckling) about the consequences of his actions for the principal. Contracts can be based both on "input" measures related to the agent's actions, and an "output" measure related to the principal's payoff. While input-based pay minimizes income risk, only output-based pay encourages the agent to use his knowledge efficiently. In general, it is optimal to use both kinds of performance measures. The results help to explain some empirical puzzles and lead to several new predictions.

Keywords: contract theory, specific knowledge, performance measurement, incentives, risk, input- vs. output-based pay

JEL Classification: D82, J33, M52

Suggested Citation

Raith, Michael, Specific Knowledge and Performance Measurement. RAND Journal of Economics, Forthcoming, Simon School Working Paper No. FR 08-08, Available at SSRN: https://ssrn.com/abstract=1154522

Michael Raith (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States
585-275-8380 (Phone)
585-273-1140 (Fax)

HOME PAGE: http://works.bepress.com/michael_raith/

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