Relative Performance Evaluation and Contract Externalities

33 Pages Posted: 27 Jul 2006 Last revised: 4 Mar 2008

See all articles by Holger Asseburg

Holger Asseburg

University of Tuebingen - Department of Business Administration

Christian Hofmann

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Multiple version iconThere are 2 versions of this paper

Date Written: December 27, 2007

Abstract

We consider the incentive characteristics of optimal linear contracts based on relative performance evaluation (RPE) for managers under moral hazard in imperfectly competitive product markets. Each contract influences the quantity choices of all competing agents causing contract externalities that affect the principals' contracting game. We analyze the relations between the optimal extent of RPE and several firm and market characteristics, allowing for heterogeneous firms and idiosyncratic firm risk. In general, we find non-monotonic comparative static results regarding the influence of market and firm-specific risk, the industry's competitiveness, and the correlation of the firms' profit.

Keywords: contract externalities, managerial incentives, product market competition, relative performance evaluation

JEL Classification: D43, D82, L13, M40

Suggested Citation

Asseburg, Holger and Hofmann, Christian, Relative Performance Evaluation and Contract Externalities (December 27, 2007). AAA 2007 Management Accounting Section (MAS) Meeting, Available at SSRN: https://ssrn.com/abstract=920805 or http://dx.doi.org/10.2139/ssrn.920805

Holger Asseburg

University of Tuebingen - Department of Business Administration ( email )

Nauklerstra├če 47
D-72074 Tuebingen
Germany

Christian Hofmann (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

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