Performance Measurement, Expectancy and Agency Theory: An Experimental Study

Abstract

Performance Measurement, Expectancy and Agency Theory: An Experimental Study Theoretical analyses of (optimal) performance measures are typically performed within the realm of the linear agency model. This model implies that, for a given compensation scheme, the agent’s optimal effort is unrelated to the amount of noise in the performance measure. In contrast, expectancy theory as developed by psychologists predicts lower effort levels for noisier performance measures. We conduct a real effort laboratory experiment and find that effort levels are invariant to changes in the distribution of the noise term, i.e. to expectancy. This suggests that enriching the economic (linear agency) model commonly applied within this area by including an expectancy parameter is not needed. JEL Classification: C91, J33

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Cite this paper

@inproceedings{Sloof2005PerformanceME, title={Performance Measurement, Expectancy and Agency Theory: An Experimental Study}, author={Randolph Sloof and C. Mirjam van Praag and Mirjam van Praag}, year={2005} }