Relative performance evaluation, agent hold-up and firm organization

Ola Kvaløy, Trond E. Olsen
2008 Journal of the Japanese and international economies (Print)  
We analyze a situation where common noise makes compensation based on relative performance evaluation (RPE) desirable, but where the agents' ability to hold-up values ex post obstruct the implementation of optimal RPE schemes. The principal can take actions to constrain the agents'hold-up power by limiting their outside options and by protecting property rights, but once these actions are costly, a trade-o¤ between incentive provision and agent control appears. The model contributes to the
more » ... y of the ...rm. It indicates why ...rms, not agents, own assets, and why peer-dependent incentive systems are more common within than between ...rms. JEL Classi...cation: D23, J33, L14
doi:10.1016/j.jjie.2007.07.004 fatcat:kxctgbne65gilmb2zqcso37fae