Agent Employment Horizons and Contracting Demand for Forward-Looking Performance Measures

Abstract

In this paper, the principal rewards an agent’s farsighted effort both in the short and long term, with the short-term reward based on a noisy, forward-looking performance measure and the long-term reward based on a potentially less noisy, trailing performance measure. The main result is that optimal contracting weights depend on the agent’s employment time horizon: the shorter the agent’s employment horizon the greater the emphasis on the forward-looking performance measure and vice versa. This implies that contracting on forward-looking performance measures can be valuable in mitigating any adverse long-term effects of employees myopically focusing on short-term trailing performance measures.