Relational Contracts with Subjective Peer Evaluations

44 Pages Posted: 27 Mar 2015

Date Written: March 25, 2015

Abstract

We study optimal contracting in a setting where a firm repeatedly interacts with multiple workers, and can compensate them based on publicly available performance signals as well as privately reported peer evaluations. If the evaluation and the effort provision are done by different workers (as in a supervisor/agent hierarchy), we show that, using both the private and public signals, the first best can be achieved even in a static setting. However, if each worker is required to both exert effort and report on his co-worker’s performance (as in a team setting), the worker’s effort incentives cannot be decoupled from his truth-telling incentives. This makes the optimal static contract inefficient and relational contracts based on the public signals increase efficiency. In the optimal contract, it may be optimal to ignore signals that are informative of the worker’s effort.

Keywords: Relational contracts, Subjective evaluation

JEL Classification: D82, D86

Suggested Citation

Deb, Joyee and Li, Jin and Mukherjee, Arijit, Relational Contracts with Subjective Peer Evaluations (March 25, 2015). Cowles Foundation Discussion Paper No. 1995, Available at SSRN: https://ssrn.com/abstract=2584953 or http://dx.doi.org/10.2139/ssrn.2584953

Joyee Deb (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Jin Li

Northwestern University - Department of Management & Strategy ( email )

Kellogg School of Management
2001 Sheridan Road
Evanston, IL 60208
United States

Arijit Mukherjee

Michigan State University ( email )

Marshall Adams Hall
East Lansing, MI 48824-1122
United States

HOME PAGE: http://www.amukherjee.net

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