The problem of designing tournament contracts under limited liability and alternative performance measures is considered. Under risk neutrality, only the best-performing agent receives an extra premium if the liability constraint becomes binding. Under risk aversion, more than one prize is...

I examine how a firm’s opportunity to verify information influences the joint use of verifiable and unverifiable information for incentive contracting. I employ a simple two-period agency model, in which contract frictions arise from limited liability and the potential unverifiability of...

Earlier studies show that contracts under subjective performance evaluation are dichotomous and punish only worst performance. I show that with limited liability payments need not be binary. More importantly, if the agent earns a rent from limited liability, the optimal contract distinguishes...

The cost minimization problem in an agency model with imperfect monitoring is considered. Under the first order approach, this can be stated as a convex minimization problem with linear inequality and equality constraints in a generally infinite dimensional function space. We apply the Fenchel...

This paper investigates the role of variance analysis procedures in aligning objectives under the condition of distorted performance measurement. A riskneutral agency with linear contracts is analyzed, whereby the agent receives postcontract, pre-decision information on his productivity. If the...