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Are Interim Performance Evaluations Optimal when the Evaluations are Subject to Manipulation?

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  • Xu Jiang

Abstract

The paper considers, in a principal-agent framework, whether or not providing interim performance evaluations is more efficient when agents can manipulate the very performance reports by which they are evaluated. Providing interim performance evaluation introduces possible dependence of subsequent strategies on interim reports. Such dependence, while alleviating previous-period incentive-compatibility constraints, also increases the (expected) later-period performance manipulation costs. The first effect provides a risk-sharing benefit, whereas the second effect increases the expected compensation cost to the agent (in utilities). Correspondingly, providing interim performance evaluation is better when the manager is sufficiently risk-averse so that the risk-reduction effect dominates.

Suggested Citation

  • Xu Jiang, 2021. "Are Interim Performance Evaluations Optimal when the Evaluations are Subject to Manipulation?," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 177(3), pages 239-260.
    • Handle: RePEc:mhr:jinste:urn:doi:10.1628/jite-2021-0006
    DOI: 10.1628/jite-2021-0006
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    More about this item

    Keywords

    interim performance evaluation; performance manipulation; optimal contracting; moral hazard;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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