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The efficiency of bonus-or-terminate incentive schemes under subjective evaluations
Institution:1. University of Heidelberg, Germany;2. University of Amsterdam and Tinbergen Institute, The Netherlands;1. Department of Civil Engineering, Sharif University of Technology, 11155-9313 Tehran, Iran;2. Institute for Nanoscience and Nanotechnology, Sharif University of Technology, 11155-9161 Tehran, Iran;1. Department of Government, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, United Kingdom;2. Faculty of Engineering, Information and Systems, University of Tsukuba, 1-1-1 Tennodai, Tsukuba, Ibaraki 305-8573, Japan;3. WZB Berlin Social Science Center, Reichpietschufer 50, D-10785 Berlin, Germany;4. Department of Economics, University of Heidelberg, Bergheimer Str. 58, 69115 Heidelberg, Germany;1. University of Cologne, Department of Economics, Albertus-Magnus Platz, D-50923 Cologne, Germany;2. Department of Economics, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, United Kingdom;1. ICREA, Universitat Pompeu Fabra and Barcelona GSE, Spain;2. Universitat Autonoma de Barcelona and Barcelona GSE, Spain;3. University of Michigan, United States
Abstract:We study a repeated principal–agent model with subjective evaluations. We construct simple bonus-or-terminate incentive schemes. In these schemes, the principal evaluates the agent every T periods. The principal pays a bonus and asks the agent to work for T more periods if the evaluation is positive. The relationship is terminated if the evaluation is negative. The inefficiencies in these schemes vanish as the agent can be more frequently evaluated. This result holds generally under objective or subjective evaluations.
Keywords:Principal–agent model  Subjective evaluations
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