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3.1. INTRODUCTION 61
Holmstrom’s conclusions concerning the noise-reducing properties of RPE are supported
by other analytical research, such as the work of Gibbons & Murphy (1990).
The second stream of literature that explains RPE use from a noise reduction standpoint,
is the empirical RPE literature. The empirical RPE literature focuses on why and to
what extent organizations use RPE. Although the empirical support for RPE is limited
in general, as argued in the previous chapters of this thesis, several studies confirm the
prevalence of RPE based on noise-reduction arguments. Examples of these papers include
Matsumara & Shin (2006), Albuquerque (2009), Gong et al. (2011), and chapter 2 of this
thesis. However, whereas the analytical literature explicitly studies the extent to which
RPE reduces noise, the empirical stream does not test noise reduction directly. Rather,
the empirical literature assumes that RPE reduces noise and uses this assumption as an
explanation for RPE use in practice. This assumption leaves the noise-reduction claim
concerning the usefulness of RPE largely untested from an empirical standpoint.
However, to further examine a theory, one must assess its untested assumptions in as direct
a manner as possible. Testing a theory’s assumptions furthers our understanding about
the quality of the applied theoretical perspective. For example, it is possible that, instead
of the applied theoretical explanation, an alternative mechanism drove prior results.
Specifically, based on the findings in chapter 2, I claim support for the noise-reduction
explanation of RPE use. This conclusion is based on analyses of how an uncertaintymeasure
(derived from the noise-reduction perspective) increases RPE use. The empirical
confirmation of this relationship, provided in the same chapter, supports the underlying
noise-reduction theory. However, despite the theoretical grounding in prior studies and the
empirical confirmation of the noise-reduction theory, it remains entirely possible that the
relation between uncertainty and RPE use is, in fact, not due to noise reduction, but due
to an alternative theoretical explanation.
Prior studies have suggested several alternative explanations for RPE use that may drive
the results in chapter 2. For example, RPE may be used as a means to pit employees or
organizational parts against each other to create a sense of internal rivalry that increases
the efficiency of the individual agents (Holmstrom 1982). A second example suggested by
Gibbons & Murphy (1990:33-S) is that RPE is used to facilitate organizational learning
(e.g., in the form of benchmarking the outputs and processes). Both of the presented applications
can be especially useful in a highly uncertain environment, where environmental
turbulence demands that firms perform optimal to survive.
An analysis of the relation between uncertainty and RPE use (as conducted in chapter 2 of
this thesis) does not help to distinguish between the noise-reduction explanation and the
two presented alternative explanations. Additionally, because the latter two explanations