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Subjective Performance Evaluation and Inequality Aversion

  • Grund, Christian

    ()

    (RWTH Aachen University)

  • Przemeck, Judith

    ()

    (University of Bonn)

Many firms use subjective performance appraisal systems due to lack of objective performance measures. In these cases, supervisors usually have to rate the performance of their subordinates. Using such systems, it is a well established fact that many supervisors tend to assess the employees too good (leniency bias) and that the appraisals hardly vary across employees of a certain supervisor (centrality bias). We explain these two biases in a model with a supervisor, who has preferences for the utility of her inequality averse subordinates, and discuss determinants of the size of the biases. Extensions of the basic model include the role of supervisor’s favoritism of one particular agent and the endogenous effort choice of agents. Whether inequality averse agents exert higher efforts then purely self-oriented ones, depends on the size of effort costs and inequality aversion.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3382.

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Length: 32 pages
Date of creation: Mar 2008
Date of revision:
Handle: RePEc:iza:izadps:dp3382
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  1. Ernst Fehr & Klaus M. Schmidt, . "A Theory of Fairness, Competition and Cooperation," IEW - Working Papers 004, Institute for Empirical Research in Economics - University of Zurich.
  2. Bentley W. MacLeod, 2003. "Optimal Contracting with Subjective Evaluation," American Economic Review, American Economic Association, vol. 93(1), pages 216-240, March.
  3. Englmaier, Florian & Wambach, Achim, 2010. "Optimal incentive contracts under inequity aversion," Munich Reprints in Economics 22027, University of Munich, Department of Economics.
  4. Dominique Demougin & Claude Fluet & Carsten Helm, 2004. "Output and Wages with Inequality Averse Agents," CIRANO Working Papers 2004s-47, CIRANO.
  5. Sturm, Bodo & Riechmann, Thomas & Dannenberg, Astrid & Vogt, Carsten, 2007. "Inequity Aversion and Individual Behavior in Public Good Games: An Experimental Investigation," ZEW Discussion Papers 07-034 [rev.], ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  6. Christian Grund & Dirk Sliwka, 2005. "Envy and Compassion in Tournaments," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(1), pages 187-207, 03.
  7. Dominique Demougin & Claude Fluet, 2003. "Group vs. Individual Performance Pay When Workers Are Envious," CIRANO Working Papers 2003s-10, CIRANO.
  8. Dominique Demougin & Claude Fluet, 2003. "Inequity Aversion in Tournament," CIRANO Working Papers 2003s-18, CIRANO.
  9. Hideshi Itoh, 2004. "Moral Hazard and Other-Regarding Preferences," The Japanese Economic Review, Japanese Economic Association, vol. 55(1), pages 18-45.
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