UC Berkeley

Carona (2008) investigates the roles of nonfinancial performance indicators and long-term commitments in an incentive contracting setting. The paper develops a multiperiod agency model in which nonfinancial performance indicators are shown to be valuable in providing the agent with desirable incentives. The relative importance of nonfinancial measures depends on the level of commitment that the principal and the agent can sustain. While long-term contracts are more efficient than short-term contracts, the analysis shows that a sequence of overlapping medium-term contracts can be as efficient as long-term contracts. In this discussion, I provide a brief review of the related streams of literature and discuss the paper’s contributions to them. The discussion also illustrates the intuition behind the paper’s main findings through a simple example and raises questions for future research.