Objective versus Subjective Performance Evaluations

Stefan Terstiege

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: Why does incentive pay often depend on subjective rather than objective performance evaluations? After all, subjective evaluations entail a credibility issue. While the most plausible explanation for this practice is lack of adequate objective measures, I argue that subjective evaluations might sometimes also be used to withhold information from the worker. I furthermore argue that withholding information is particularly important under circumstances where the credibility issue is small. The statements are derived from a two-stage principal-agent model in which the stochastic relationship between effort and performance is unknown.

Keywords: Performance evaluation; principal-agent; moral hazard (search for similar items in EconPapers)
JEL-codes: D83 D86 M12 M52 (search for similar items in EconPapers)
Date: 2013-08-01
New Economics Papers: this item is included in nep-cse, nep-cta, nep-hrm and nep-mic
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