The "Ratchet Principle" and Performance Incentives
The use of current performance as a partial basis for setting future targets is an almost universal feature of economic planning. This "ratchet principle," as it is sometimes called, creates a dynamic incentive problem for the enterprise. Higher rewards from better current performance must be weighed against the future assignment of more ambitious targets. In this paper I formulate the problem of the enterprise as a multiperiod stochastic optimization model incorporating an explicit feedback mechanism for target setting. I show that an optimal solution is easily characterized, and that the incentive effects of the ratchet principle can be fully analyzed in simple economic terms.
Year of publication: |
1980
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Authors: | Weitzman, Martin L. |
Published in: |
Bell Journal of Economics. - The RAND Corporation, ISSN 0361-915X. - Vol. 11.1980, 1, p. 302-308
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Publisher: |
The RAND Corporation |
Saved in:
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