Jan 1, 1971
A Critique of the Theory
Summary of the major theoretical articles bearing on the theory of performance contracting. Although no general definitive statement on the theory has been found, most of the major elements are presented. Two especially pertinent contributions are reviewed to provide a foundation for a fully articulated theory of performance contracting: "A Formal Theory of the Employment Relationship," by H. A. Simon; and "Optimal Rewards in Incentive Systems," by G. M. Yowell, Jr. Other articles concern the theory of incentives for cost reduction. Simon's work is based on the assumption that it may be advantageous to defer production decisions; Yowells' theory of incentives concerns situations in which the agent makes production decisions early in the contract. If the theory of incentives were broadened to include the agent's response to unforeseen events, it would become a more realistic theory and would nearly constitute a theory of performance contracting.