Are Interim Performance Evaluations Optimal When the Evaluations Are Subject to Manipulation?

68 Pages Posted: 19 Jun 2017 Last revised: 4 Feb 2021

Date Written: February 3, 2021

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.

Keywords: Interim Performance Evaluation, Performance Manipulation, Optimal Contracting, Moral Hazard

JEL Classification: D86, M41

Suggested Citation

Jiang, Xu, Are Interim Performance Evaluations Optimal When the Evaluations Are Subject to Manipulation? (February 3, 2021). Available at SSRN: https://ssrn.com/abstract=2987966 or http://dx.doi.org/10.2139/ssrn.2987966

Xu Jiang (Contact Author)

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

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