Accounting | Finance | Management | Marketing | Operations and Information Systems
Early Versus Late Effort in Dynamic Agencies with Unverifiable
Jens Robert Schöndube
Volume 1 | Issue 2 | December 2008 | www.business-research.or g | ISSN 1866 - 8 6 5 8
BuR -- Business Research
Official Open Access Journal of VHB
Verband der Hochschullehrer für Betriebswirtschaft e.V.
Volume 1 | Issue 2 | December 08 | 165--186
Early Versus Late Effort in Dynamic Agencies
with Unverifiable Information
Jens Robert Schöndube, Faculty of Economics and Management, Otto-von-Guericke University Magdeburg,
In this paper we analyze a dynamic agency problemwhere contracting parties do not know the agent’s
future productivity at the beginning of the relationship. We consider a two-period model where both
the agent and the principal observe the agent’s second-period productivity at the end of the first period.
This observation is assumed to be non-verifiable information. We compare long-term contracts with
short-term contracts with respect to their suitability tomotivate effort in both periods. On the one hand,
short-term contracts allow for a better fine-tuning of second-period incentives as they can be aligned
with the agent’s second-period productivity. On the other hand, in short-term contracts first-period
effort incentives might be distorted as contracts have to be sequentially optimal. Hence, the difference
between long-term and short-term contracts is characterized by a trade-off between inducing effort in
the first and in the second period. We analyze the determinants of this trade-off and demonstrate its
implications for performance measurement and information system design.
Keywords: dynamic agency problem, limited commitment, unverifiable information, performance
Manuscript received December 7, 2007, accepted by Rainer Niemann (Accounting) October 3, 2008.
The agency-theoretic literature has spent an enor-
mous amount of effort analyz