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Communicating Subjective Evaluations

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  • Matthias Lang

Abstract

Should principals explain and justify their evaluations? Suppose the principal’s evaluation is private information, but she can provide justification by sending a costly cheap-talk message. If she does not provide justification, her message space is restricted, but the message is costless. I show that the principal justifies her evaluation to the agent if the evaluation indicates bad performance. The justification assures the agent that the principal has not distorted the evaluation downwards. In equilibrium, the wage increases in the agent’s performance, when the principal justifies her evaluation. For good performance, however, the principal pays a constant high wage without justification.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4830.

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Date of creation: 2014
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Handle: RePEc:ces:ceswps:_4830

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Keywords: communication; justification; subjective evaluation; stochastic contracts; disclosure;

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Cited by:
  1. Bester, Helmut & Münster, Johannes, 2013. "Subjective evaluation versus public information," Discussion Papers 2013/6, Free University Berlin, School of Business & Economics.

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