The ‘Ratchet Principle’ and Performance Incentives¶
Weitzman, M. L. (1980). The ‘Ratchet Principle’ and Performance Incentives. The Bell Journal of Economics, 11(1), 302-308.
Cited by¶
5 citations across 5 artifacts.
Each citation links to the sentence it supports in the citing article.
Primes¶
- Reference-Point Dependence
- Independent settability holds, and is exactly the problem: the committee moves the origin without moving anything the rep delivers.
This sourceModels the ratchet effect in which the principal resets the next period's target upward from realized performance.
- Independent settability holds, and is exactly the problem: the committee moves the origin without moving anything the rep delivers.
Mechanisms¶
- Baseline Validation Review
- The opposite failure is the ratchet effect: rebuilding the baseline every cycle out of caution, so a quota drifts upward each period regardless of real change, which erodes trust and invites gaming.
This sourceModels the ratchet principle by which current performance affects later targets and creates incentives to conceal productive capability.
- The opposite failure is the ratchet effect: rebuilding the baseline every cycle out of caution, so a quota drifts upward each period regardless of real change, which erodes trust and invites gaming.
- Budget Variance Correction Cycle
- Held to a target they cannot honestly meet, managers spend down remaining budget at year-end to avoid a future cut, or shift costs between periods to smooth the variance — a ratchet effect in which good performance is punished with tighter future targets, so honest reporting is discouraged.
This sourceModels the ratchet incentive created when current performance is used to set more demanding future targets.
- Held to a target they cannot honestly meet, managers spend down remaining budget at year-end to avoid a future cut, or shift costs between periods to smooth the variance — a ratchet effect in which good performance is punished with tighter future targets, so honest reporting is discouraged.
- Budget Variance Review
- The sharpest is the ratchet effect: when this period's actual silently becomes next period's target, managers learn to underspend deliberately and to hide slack, so the very signal the review depends on gets gamed into optimism.
This sourceDefines the ratchet principle as using current performance to set future targets, creating an incentive to weigh current gains against more demanding future targets.
- The sharpest is the ratchet effect: when this period's actual silently becomes next period's target, managers learn to underspend deliberately and to hide slack, so the very signal the review depends on gets gamed into optimism.
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