Performance measurement systems, incentives, and the optimal allocation of responsibilities

I study the joint choice of responsibility assignment, performance measures, and rewards for a two-stage process where the quality of the initial stage work affects the required final stage effort. By assigning responsibilities to give the initial stage agent an incentive to sabotage the final stage, output is made informative about this agent's attention to quality. I find conditions under which it is cost-effective to create and to contractually use such information. This analysis makes formal that the value of a performance measure is determined not simply by its congruity and precision but by its influence on the optimal organisational design. (C) 1998 Elsevier Science B.V. All rights reserved.