Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/282021 
Authors: 
Year of Publication: 
2022
Series/Report no.: 
Discussion Paper No. 329
Publisher: 
Ludwig-Maximilians-Universität München und Humboldt-Universität zu Berlin, Collaborative Research Center Transregio 190 - Rationality and Competition, München und Berlin
Abstract: 
Subjective evaluations are widely used, but call for different contracts from classical moral-hazard settings. Previous literature shows that contracts require payments to third parties. I show that the (implicit) assumption of deterministic contracts makes payments to third parties necessary. This paper studies incentive contracts with stochastic compensation, like payments in stock options or uncertain arbitration procedures. These contracts incentivize employees without the need for payments to third parties. In addition, stochastic contracts can be more efficient and can make the principal better off compared to deterministic contracts. My results also address the puzzle about the prevalence of labor contracts with stochastic compensation.
Subjects: 
subjective evaluations
stochastic contracts
stochastic compensation
budget-balanced contracts
moral hazard
subjective performance measures
incentives
JEL: 
D80
J33
J41
J70
Document Type: 
Working Paper

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