Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/94169
Authors: 
Bester, Helmut
Münster, Johannes
Year of Publication: 
2013
Series/Report no.: 
SFB/TR 15 Discussion Paper 399
Abstract: 
This paper studies a principal-agent relation in which the principal's private information about the agent's effort choice is more accurate than a noisy public performance measure. For some contingencies the optimal contract has to specify ex post inefficiencies in the form of inefficient termination (firing the agent) or third-party payments (money burning). We show that money burning is the less efficient incentive device: it is used at most in addition to firing and only if the loss from termination is small. Under an optimal contract the agent's wage may depend only on the principal's report and not on the public signal. Nonetheless, public information is valuable as it facilitates truthful subjective evaluation by the principal.
Subjects: 
Subjective evaluation
moral hazard
termination clauses
third-party payments
JEL: 
D23
D82
D86
J41
M12
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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