DP1107 | Performance Comparisons and Dynamic Incentives

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It is well known that comparative performance information (CPI) can enhance efficiency in static principal-agent relationships by improving the trade-off between insurance and incentives in the design of explicit contracts. In dynamic settings, however, there may be implicit as well as explicit incentives (e.g. managerial career concerns and the ratchet effect in regulation). We show that the dynamic effects of CPI on implicit incentives can either reinforce or oppose the familiar (static) insurance effect and can in either case be the dominant factor affecting efficiency. The overall welfare effects of CPI are thus ambiguous and can be characterized in terms of the underlying information structure.