TITLE:
The Use of Non-Verifiable Information Regarding the Agent’s Action in Compensation Contracts
AUTHORS:
Pattarin Adithipyangkul
KEYWORDS:
Subjective Performance Evaluation, Implicit Contract, Non-Verifiable Information
JOURNAL NAME:
Theoretical Economics Letters,
Vol.6 No.2,
April
26,
2016
ABSTRACT: Subjective,
non-verifiable information (such as satisfaction rating) is often used to supplement
objective, verifiable information (such as financial numbers) in contracting.
Empirical research finds that non-verifiable information can be used in
contracting as a subjective performance measure or as subjective weighting on
an objective performance measure. The differences between the two options have
not yet been thoroughly explored analytically. This paper considers a
multi-task setting where the non-verifiable performance signal provides
incremental information about an aspect of the agent’s action. The research
finds that when the agent has unlimited liability, both contracting schemes
deliver the same payoff to the principal. However, the principal may strictly
prefer a subjective weighting scheme in a setting where the agent has limited liability.