The Credibility of Performance Feedback in Tournaments
42 Pages Posted: 19 Sep 2014
Date Written: September 17, 2014
This paper studies the effect of performance feedback on tournament outcomes, when a possibly dishonest principal may manipulate the agents' expectations to stimulate their effort. Under plausible circumstances, an increase in the principal's propensity to tell the truth (i.e., integrity) induces a mean preserving spread in the distribution of effort and leads to a decrease in expected profits and welfare. More generally, I identify conditions under which a lower integrity can improve the effectiveness of financial incentives in inducing the agents' effort, thus leading to higher expected profits for the principal.
Keywords: Tournaments, Cheap-Talk, Contracts
JEL Classification: D82, D83, D84
Suggested Citation: Suggested Citation