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Optimal Contracts for Lenient Supervisors

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  • Giebe, Thomas
  • Gürtler, Oliver
Abstract
We consider a situation where an agent's effort is monitored by a supervisor who cares for the agent's well being. This is modeled by incorporating the agent's utility into the utility function of the supervisor. The first best solution can be implemented even if the supervisor's preferences are unknown. The corresponding optimal contract is similar to what we observe in practice: The supervisor's wage is constant and independent of his report. It induces one type of supervisor to report the agent's performance truthfully, while all others report favorably independent of performance. This implies that overstated performance (leniency bias) may be the outcome of optimal contracts under informational asymmetries.

Suggested Citation

  • Giebe, Thomas & Gürtler, Oliver, 2008. "Optimal Contracts for Lenient Supervisors," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 237, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    • Handle: RePEc:trf:wpaper:237
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Lang, Matthias, 2019. "Communicating subjective evaluations," Journal of Economic Theory, Elsevier, vol. 179(C), pages 163-199.
    2. Gary E. Bolton & David J. Kusterer & Johannes Mans, 2015. "Inflated reputations: Uncertainty, leniency & moral wiggle room in trader feedback systems," Cologne Graduate School Working Paper Series 06-04, Cologne Graduate School in Management, Economics and Social Sciences, revised 29 Jul 2016.
    3. Robert Dur & Jan Tichem, 2012. "Social Relations and Relational Incentives," Tinbergen Institute Discussion Papers 12-054/1, Tinbergen Institute.
    4. Manthei, Kathrin & Sliwka, Dirk, 2018. "Multitasking and Subjective Performance Evaluations: Theory and Evidence from a Field Experiment in a Bank," IZA Discussion Papers 11581, Institute of Labor Economics (IZA).
    5. Robert Dur & Jan Tichem, 2015. "Altruism and Relational Incentives in the Workplace," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(3), pages 485-500, September.
    6. De Chiara, Alessandro & Livio, Luca & Ponce, Jorge, 2018. "Flexible and mandatory banking supervision," Journal of Financial Stability, Elsevier, vol. 34(C), pages 86-104.
    7. Lucia Marchegiani & Tommaso Reggiani & Matteo Rizzolli, 2013. "Severity vs. Leniency Bias in Performance Appraisal: Experimental evidence," BEMPS - Bozen Economics & Management Paper Series BEMPS01, Faculty of Economics and Management at the Free University of Bozen.
    8. Shuo Liu & Dimitri Migrow, 2019. "Designing organizations in volatile markets," ECON - Working Papers 319, Department of Economics - University of Zurich.
    9. Letina, Igor & Liu, Shuo & Netzer, Nick, 2020. "Delegating performance evaluation," Theoretical Economics, Econometric Society, vol. 15(2), May.
    10. Delfgaauw, Josse & Souverijn, Michiel, 2016. "Biased supervision," Journal of Economic Behavior & Organization, Elsevier, vol. 130(C), pages 107-125.
    11. Marchegiani, Lucia & Reggiani, Tommaso & Rizzolli, Matteo, 2016. "Loss averse agents and lenient supervisors in performance appraisal," Journal of Economic Behavior & Organization, Elsevier, vol. 131(PA), pages 183-197.
    12. De Chiara, Alessandro & Livio, Luca, 2017. "The threat of corruption and the optimal supervisory task," Journal of Economic Behavior & Organization, Elsevier, vol. 133(C), pages 172-186.
    13. B. William Demeré & Karen L. Sedatole & Alexander Woods, 2019. "The Role of Calibration Committees in Subjective Performance Evaluation Systems," Management Science, INFORMS, vol. 65(4), pages 1562-1585, April.
    14. Jan Tichem, 2013. "Leniency Bias in Long-Term Workplace Relationships," Tinbergen Institute Discussion Papers 13-196/VII, Tinbergen Institute.
    15. Andres, Christian & Fernau, Erik & Theissen, Erik, 2014. "Should I stay or should I go? Former CEOs as monitors," Journal of Corporate Finance, Elsevier, vol. 28(C), pages 26-47.
    16. Golman, Russell & Bhatia, Sudeep, 2012. "Performance evaluation inflation and compression," Accounting, Organizations and Society, Elsevier, vol. 37(8), pages 534-543.
    17. Patrick Kampkötter & Dirk Sliwka, 2016. "The Complementary Use of Experiments and Field Data to Evaluate Management Practices: The Case of Subjective Performance Evaluations," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 172(2), pages 364-389, June.
    18. Daniel Müller & Philipp Weinschenk, 2015. "Rater Bias and Incentive Provision," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(4), pages 833-862, October.
    19. Joeri Sol, 2016. "Peer Evaluation: Incentives and Coworker Relations," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 25(1), pages 56-76, March.
    20. Gürtler, Marc & Gürtler, Oliver, 2014. "The interaction of explicit and implicit contracts: A signaling approach," Journal of Economic Behavior & Organization, Elsevier, vol. 108(C), pages 135-146.
    21. Christian Grund & Judith Przemeck, 2012. "Subjective performance appraisal and inequality aversion," Applied Economics, Taylor & Francis Journals, vol. 44(17), pages 2149-2155, June.
    22. Liu, Shuo & Migrow, Dimitri, 2022. "When does centralization undermine adaptation?," Journal of Economic Theory, Elsevier, vol. 205(C).
    23. Kathrin Manthei & Dirk Sliwka, 2019. "Multitasking and Subjective Performance Evaluations: Theory and Evidence from a Field Experiment in a Bank," Management Science, INFORMS, vol. 65(12), pages 5861-5883, December.
    24. Andres, Christian & Fernau, Erik & Theissen, Erik, 2012. "Is it better to say goodbye? When former executives set executive pay," CFR Working Papers 12-02, University of Cologne, Centre for Financial Research (CFR).
    25. Gary E. Bolton & David J. Kusterer & Johannes Mans, 2019. "Inflated Reputations: Uncertainty, Leniency, and Moral Wiggle Room in Trader Feedback Systems," Management Science, INFORMS, vol. 65(11), pages 5371-5391, November.

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    More about this item

    Keywords

    Subjective performance evaluation; leniency; supervisor; private infrmation;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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