Dynamic Evaluation Design
38 Pages Posted: 12 Oct 2017 Last revised: 2 Nov 2020
Date Written: October 2020
A principal owns a firm, hires an agent of uncertain productivity, and designs a dynamic policy for evaluating his performance. The agent observes ongoing evaluations and decides when to quit. When not quitting, the agent is paid a wage that is linear in his perceived productivity; the principal claims the residual performance. After quitting, the players secure fixed outside options. I show that equilibrium evaluation policies are Pareto efficient. In a minimally informative equilibrium, for a broad class of performance technologies, the agent's wage deterministically grows with tenure. My analysis suggests that endogenous performance evaluation plays an important role in shaping careers in organizations.
Keywords: evaluation, information design, career concerns, bandit experimentation, downward wage rigidity, up-or-out, internal labor markets
JEL Classification: C72, D82, D83, M52
Suggested Citation: Suggested Citation