Delegating Performance Evaluation
University of Zurich, Department of Economics, Working Paper No. 266, Revised version
66 Pages Posted: 26 Oct 2017 Last revised: 6 Nov 2018
Date Written: November 2018
We study optimal incentive contracts with multiple agents when performance evaluation is delegated to a reviewer. The reviewer may be biased in favor of the agents, but the degree of bias is unknown to the principal. We show that a contest, which is a contract in which the principal determines a set of prizes to be allocated to the agents, is optimal. By using a contest, the principal can commit to sustaining incentives despite the reviewer's potential leniency bias. The optimal effort profile can be uniquely implemented by an all-pay auction with a cap. Our analysis has implications for applications as diverse as the design of worker compensation, the awarding of research grants, and the allocation of foreign aid.
Keywords: Performance evaluation, delegation, optimality of contests
JEL Classification: D02, D82, M52
Suggested Citation: Suggested Citation