Delegation and Interim Performance Evaluation

63 Pages Posted: 24 Apr 2013

See all articles by Miriam Schuette

Miriam Schuette

Ludwig Maximilian University of Munich (LMU) - Munich Graduate School of Economics (MGSE)

Philipp C. Wichardt

University of Rostock - Department of Economics

Date Written: April 23, 2013

Abstract

This paper considers the effects of an interim performance evaluation on the decision of a principal to delegate authority to a potentially biased but better informed agent. Assuming the agents’ outside option to be determined by market beliefs about their type, interim evaluations (a) provide a possibility for the principal to potentially separate biased agents from unbiased agents and (b) induce an incentive for biased agents to imitate unbiased ones in order to retain the decision authority and to increase their wages in later periods (in case of public evaluation). We show that the principal always profits from a private evaluation while a public evaluation is only beneficial if the corresponding wage effects are not too costly. Nevertheless, the principal prefers public over private evaluation if the imitation incentive for the biased type is high enough. Finally, regarding implications for economic policy, we show that in view of aggregate welfare any evaluation conducted ought to be disclosed to the public.

Keywords: delegation, signaling, reputation

JEL Classification: C720, C730, D820, D860, L220, M540

Suggested Citation

Schuette, Miriam and Wichardt, Philipp C., Delegation and Interim Performance Evaluation (April 23, 2013). CESifo Working Paper Series No. 4193. Available at SSRN: https://ssrn.com/abstract=2255376

Miriam Schuette (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Munich Graduate School of Economics (MGSE) ( email )

Kaulbachstrasse 45
München, 80539
Germany

Philipp C. Wichardt

University of Rostock - Department of Economics ( email )

Ulmenstr. 69
Rostock, 18057
Germany

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