ECON 308 Study Guide - Midterm Guide: W. M. Keck Observatory, Opportunism, Horizon Problem
Document Summary
In formativeness principle states that improvement in the precision of measuring employees" effort by incorporating more information of employees" effort reduces the cost of inefficient risk sharing and leads to a more efficient effort choice by employees. The informativeness principle implies that information about other employees" effort and/or output should be included in an incentive compensation, such as relative performance evaluation. It also implies that there is a tradeoff between the costs of developing and implementing better performance measures, and the benefits of improving effort motivation and more effective risk sharing. Relative performance evaluation is the using of other employee"s performance to adjust the compensation of an employee. This makes sense if common random factors affect the performance of different employees. Electing a poor performer to be standard. When objective performance evaluation leads employees to exert effort on measurable performance attributes and de-emphasize on non-measurable performance attributes, subjective performance evaluation is supplemented to yield a comprehensive performance evaluation.
