The Incentive Effects of Interim Performance Evaluations

Alessandro Lizzeri · Margaret Meyer · Nicola Persico

66 citations0/0 files storedOxford University Research Archive (ORA) (University of Oxford)

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Auction Theory and Applications Game Theory and Applications Experimental Behavioral Economics Studies

Abstract

We study a dynamic moral hazard model where the agent does not fully observe his performance. We consider the incentive effects of providing feedback to the agent: revealing to the agent how well he is doing. We show that, if the incentive scheme is exogenously given, there is a wide range of cases where the agent works harder if feedback is provided. However, the agent earns more money in this scenario. We then characterize the optimal incentive schemes in the two scenarios and we show that the principal is better off if feedback is not provided; the expected cost of inducing any given level of expected effort is lower in the no-revelation scenario.

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References

1987Aggregation and Linearity in the Provision of Intertemporal Incentives 2001Contracting theory and accounting 2001The Optimal Allocation of Prizes in Contests 1985Repeated Moral Hazard 1990Short-term contracts and long-term agency relationships 1986Work Incentives, Hierarchy, and Internal Labor Markets 1991Information and Timing in Repeated Partnerships 1998Earnings Management and the Revelation Principle

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2005Morale hazard 2015Incentives to motivate 2007Performance Evaluations and Efficient Sorting 2012PEER TRANSPARENCY IN TEAMS: DOES IT HELP OR HINDER INCENTIVES?*2016Killer Incentives: Status Competition and Pilot Performance during World War II 2007The Retention Effect of Withholding Performance Information 2004Specific Knowledge and Performance Measurement

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