Author(s)

Pattarin Adithipyangkul

School of Accounting, Curtin University of Technology, Perth, Australia.

Subjective, non-verifiable information (such as satisfaction rating) is often used to supplement objective, verifiable information (such as financial numbers) in contracting. Empirical research finds that non-verifiable information can be used in contracting as a subjective performance measure or as subjective weighting on an objective performance measure. The differences between the two options have not yet been thoroughly explored analytically. This paper considers a multi-task setting where the non-verifiable performance signal provides incremental information about an aspect of the agent’s action. The research finds that when the agent has unlimited liability, both contracting schemes deliver the same payoff to the principal. However, the principal may strictly prefer a subjective weighting scheme in a setting where the agent has limited liability.

Subjective Performance Evaluation, Implicit Contract, Non-Verifiable Information

Adithipyangkul, P. (2016) The Use of Non-Verifiable Information Regarding the Agent’s Action in Compensation Contracts. Theoretical Economics Letters, 6, 234-245. doi: 10.4236/tel.2016.62026.