The use of current performance as a basis for determining future targets, often referred to as “target ratcheting,” is a common practice in many organizations. The incentive effects of such target-setting practices have been studied by a large stream of economic literature. For example, Weitzman (1980), in an early study, formally models the “ratchet principle” of planning, which holds that “current performance acts like a notched gear wheel in fixing point of departure for next period's target.” Since then, the theoretical literature has made significant advances in our understanding of the economics of target ratcheting (Milgrom and Roberts 1992; Laffont and Tirole 1993). However, empirical evidence in this area has been scarce until recently. In this commentary, we summarize key insights from the economic literature, discuss the extent to which they are corroborated in prior empirical tests, highlight the contribution of the two new empirical studies...
Target Ratcheting and Incentives: Theory, Evidence, and New Opportunities
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Raffi J. Indjejikian, Michal Matějka, Jason D. Schloetzer; Target Ratcheting and Incentives: Theory, Evidence, and New Opportunities. The Accounting Review 1 July 2014; 89 (4): 1259–1267. doi: https://doi.org/10.2308/accr-50745
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