Moral hazard in teams with subjective evaluations

Chen Cheng

RAND Journal of Economics, 2021, vol. 52, issue 1, 22-48

Abstract: This article studies moral hazard in teams where workers' wages depend on two types of performance measures: objective team output and subjective evaluations. The evaluations include both self‐ and peer evaluations. I find that when evaluations become less subjective, workers' wages should be more sensitive not only to their evaluations but also to the team's output. I also show that subjective evaluations should be used in relative terms only when the degree of subjectivity is not too high. The results also associate the introduction of a budget breaker with the level of subjectivity within organizations.

Date: 2021
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https://doi.org/10.1111/1756-2171.12360

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