Abstract
We derive sufficient conditions for ranking performance evaluation systems in multi-task
agency models using both optimal and linear contracts in terms of a second-order stochastic
dominance (SSD) condition on the likelihood ratios. The SSD condition can be replaced by
a variance-covariance matrix of likelihood ratios (VCM) condition when the utility function
is square-root, the performance measures are normally distributed, and for LEN models. We
identify existing results derived under the LEN assumptions that rely on the VCM condition
and, thus, also hold for optimal contracts.
agency models using both optimal and linear contracts in terms of a second-order stochastic
dominance (SSD) condition on the likelihood ratios. The SSD condition can be replaced by
a variance-covariance matrix of likelihood ratios (VCM) condition when the utility function
is square-root, the performance measures are normally distributed, and for LEN models. We
identify existing results derived under the LEN assumptions that rely on the VCM condition
and, thus, also hold for optimal contracts.
| Original language | English |
|---|---|
| Publisher | SSRN: Social Science Research Network |
| Publication status | Published - 2009 |
| Externally published | Yes |