We thank the editor David Myatt and two anonymous referees for very useful comments and suggestions. We also thank Kalyan Chatterjee, Stephen Ching, Jacques Crémer, Jin Li, Jianpei Li, Sanxi Li, Ping Lin, Jeffrey Reuer, Wing Suen, Zhigang Tao, Frances Xu and participants in the 2010 Econometric Society World Congress (Shanghai) and other seminars held at CUHK, HKU, and Seoul National University for helpful comments. Financial support from the Guangdong Natural Science Foundation (S2012040007983), Guangdong Provincial Science and Technology Project (2011B061200008) and HKRGC (GRFs HKU74291B and HKU742709H) are acknowledged. All remaining errors are our own.
Interim Performance Evaluation in Contract Design
Article first published online: 2 APR 2013
© 2013 The Author(s). The Economic Journal © 2013 Royal Economic Society
The Economic Journal
Volume 123, Issue 569, pages 665–698, June 2013
How to Cite
Chen, B. R. and Stephen Chiu, Y. (2013), Interim Performance Evaluation in Contract Design. The Economic Journal, 123: 665–698. doi: 10.1111/ecoj.12018
- Issue published online: 7 JUN 2013
- Article first published online: 2 APR 2013
- Accepted manuscript online: 3 DEC 2012 12:52PM EST
- Manuscript Accepted: 8 OCT 2012
- Manuscript Received: 23 JAN 2011
We study a principal–agent problem with sequential efforts and limited liability. An interim performance evaluation (IPE) allows the principal to learn the success of earlier efforts with some noise. We find conditions under which it is desirable to conduct such an IPE. A trade-off is identified between the beneficial effect of the agent's morale being boosted by a positive IPE outcome and the harmful effect of his morale being damaged by a negative one. We study both objective and subjective IPEs and characterise in each scenario the optimal contract and compare the corresponding effort plan with the first-best effort plan.