The efficiency of bonus-or-terminate incentive schemes under subjective evaluations

Abstract

We study a repeated principal agent model with subjective evaluations. We construct simple bonus-or-terminate incentive schemes. In these schemes, the principal evaluates the agent every T periods. The principal pays a bonus and asks the agent to work for T more periods if the evaluation is positive. The relationship is terminated if the evaluation is negative. The inefficiencies in these schemes vanish as the agent can be more frequently evaluated. This result holds generally under objective or subjective evaluations. (C) 2014 Elsevier Inc. All rights reserved.