Vague by Design: Performance Evaluation and Learning From Wages

Franz Ostrizek

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: We study a dynamic principal-agent setting in which both sides learn about the importance of effort. The quality of the agent’s output is not observed directly. Instead, the principal jointly designs an evaluation technology and a wage schedule. More precise performance evaluation reduces current agency costs but promotes learning, which is shown to increase future agency costs. As a result, the optimal evaluation technology is both imprecise and tough: a bad performance is always sanctioned, but a good one is not always recognized. We also study the case in which principal and agent have different priors, for instance because the agent is overconfident. Then, the principal uses a tough evaluation structure to preserve the agent’s profitable misperception. For an underconfident agent, by contrast, she either uses a fully informative evaluation in order to promote learning and eliminate costly underconfidence, or is lenient if learning is too costly.

Keywords: Moral Hazard; Performance Evaluation; Learning; Information Design (search for similar items in EconPapers)
JEL-codes: D83 D86 M50 (search for similar items in EconPapers)
Pages: 45
Date: 2022-06
New Economics Papers: this item is included in nep-cta, nep-dem, nep-hrm and nep-mic
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.crctr224.de/research/discussion-papers/archive/dp358 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_2022_358

Access Statistics for this paper

More papers in CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany Kaiserstr. 1, 53113 Bonn , Germany.
Bibliographic data for series maintained by CRC Office ().