Ranking the methods of performance evaluation on human capital

Abstract

This paper considers a risk neutral principal and multiple risk-neutral agents relationship in which each agent decides the way affecting on his own production efficiency in two dimensions: the agent's effort choice and the location decision he makes. Principal also has her taste, her utility from the output produced by this agent decreases. Given this environment, this paper compares an APE(absolute performance evaluation) contract and a rank-order tournament contract which is a RPE(relative performance evaluation) contract, and an arbitrary contract which is the mixed form of the above contracts. A tournament contract is preferred than APE when the distance from preferred location of principal to the most efficient location of each agent is equal. APE is dominant when the agent's marginal efficiency loss from deviating his most efficient location is suffciently larger than the transportation cost of the principal. It turned out that mixed contract is dominated by tournament contracts when the winning probability is even.