Optimal Design of Peer Review and Self-Assessment Schemes

A principal must decide whether or not to implement a project which originated with one of her employees. The employees have private information about the quality of the project. A successfully implemented project raises the inventor's chance of promotion, at his peer's expense, but a failed project may ruin the inventor's career. If the inventor is already ahead in his career, then he may be tempted to suppress his own ideas in order not to risk a big failure. If he is not ahead, then he is instead tempted to exaggerate the quality of his ideas in order to get ahead. The peer may either try to promote the inventor's bad ideas to see him fail, or to denigrate promising ideas to stop the inventor from getting ahead. Within the class of incentive compatible and renegotiation-proof mechanisms, self-assessment (without any peer reports) is optimal. Truthtelling can be guaranteed in different ways. For example, to avoid the exaggeration effect, the inventor can be promised some chance of promotion even if his project is cancelled, or he can be paid a relatively high wage when he is not promoted. We show how the optimal method depends on the parameters.