610-12 - ECO610401 Monday,December8th PerformanceMeasures

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ECO 610-401 Monday, December 8 th Performance Measures Readings, Brickley et al., 16; 19:575-591 Extended Assignment 3 due
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Principal-Agent Problems Recall the principle-agent problem: Output by agent (employee) depends on her effort and some  other random (and unknown) factors: Q = ae + u where e is effort and u is random component Payment structure might be C = W o  + BQ where C is total compensation, W o  is base salary, and B is  commission (piece) rate If B < 1 then worker has incentive to shirk But have B > 0 means that worker has risk (payment depends  on risk: C = W o  + B(ae+ u) = W o  + Bae + Bu
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Contractible Output Note that we assume that contract can be written on Q,  that is, Q is an  objective performance measure . Other assumptions: Principal knows employee’s production function  (Q=ae+u) Output can be observed at zero cost One measure of performance – output
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This note was uploaded on 01/13/2012 for the course ECONOMICS 610 taught by Professor Staff during the Fall '11 term at Gateway Tech.

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610-12 - ECO610401 Monday,December8th PerformanceMeasures

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