Costs and benefits of discretion in performance evaluation and patterns of bias

Max-Frederik Neubert and Barbara Schoendube-Pirchegger ()
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Barbara Schoendube-Pirchegger: Faculty of Economics and Management, Otto-von-Guericke University Magdeburg

No 25003, FEMM Working Papers from Otto-von-Guericke University Magdeburg, Faculty of Economics and Management

Abstract: This paper investigates incentive effects from subjective performance evaluation (SPE) in an agency setting. An employee (agent) is evaluated by his superior (principal) via a subjective, potentially biased, performance report. We assume that this subjectiveness in evaluation affects the utility of both players, causing costs from biasing the report to the principal and benefits (costs) from over- (under-) evaluation to the agent. If the superior chooses the reporting bias sequentially optimal, we find that benefits from subjective, as opposed to objective performance measurement, do not outweigh its costs. If, in contrast, the supervisor is able to commit to an ex ante optimal bias choice, SPE can be beneficial if the agent’s preference for over-evaluation is sufficiently strong. While a centrality bias arises independent from the supervisor’s ability to commit, a leniency bias results only along with an ex ante optimal bias.

Keywords: agency; subjective performance evaluation; behavioral accounting; accuracy; leniency; centrality (search for similar items in EconPapers)
JEL-codes: C72 D82 M40 M52 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2025
New Economics Papers: this item is included in nep-hrm, nep-mic and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:mag:wpaper:25003

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