Monday, September 24, 2012

How to best compensate a supervisor

Suppose you are a manager in a firm where it is difficult to observe the performance of workers, such as faculty, computer programmers or lawyers. You hire a supervisor for a team. How should you compensate the supervisor such that he puts his best effort and reports the truth to you? And how can you avoid that underlings bribe the supervisor for a good report card?

Even when being bribed is costless, Alessandro De Chiara and Luca Livio solve this seemingly impossible problem with an interesting idea: it matters when the supervisor files his report. If the supervisor has to file a report before outcomes can be observed, for example before a contract is finished, he can still make sure that workers do their job. If the report is submitted later, the supervisor can easily be bribed, and there is no incentive for workers to do well. The critical aspect here is that there is uncertainty in work outcomes and the supervisor is risk averse. Couple that with better compensation if the report corresponds to the subsequently observed outcome, and you are done.

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