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Distorted performance measures in compensation contracts elicit suboptimal behavioral responses that may even prove to be dysfunctional (gaming). This paper applies the empirical test developed by Courty and Marschke (2008) to detect whether the widely used class of Residual Income based performance measures —such as Economic Value Added (EVA)— is distorted, leading to unintended agent behavior. The paper uses a difference-in-differences approach to account for changes in economic circumstances and the self-selection of firms using EVA. Our findings indicate that EVA is a distorted performance measure that elicits the gaming response.

Publication information

Original languageEnglish
Place of PublicationAmsterdam
PublisherTinbergen Institute
Number of pages27
StatePublished - 2014
SeriesTinbergen Institute Discussion Papers
Number14-056/V

ID: 40024789