The Effects of Information Acquisition Costs and Transparency about Managers' Own Task Effort in Subjective Performance Evaluation: Experimental Evidence

Abstract

Managers need to acquire information about their employees to subjectively evaluate their performance. We examine the effects of information acquisition costs on employee-manager relationships and how these effects differ depending on the transparency of managers' own task effort. Consistent with our predictions, the results of our experiment show that the effect of information acquisition costs on managers' own task effort is less negative when transparency is high than when it is low because of managers' attempts to lead by example. However, we predict and find a negative effect of information acquisition costs on managers' willingness to acquire costly information that is more pronounced when transparency about managers' own task effort is high. While we also find that information acquisition costs have a negative effect on employees' effort, the transparency about managers' own task effort does not moderate this negative effect. These findings increase our understanding of the costs and benefits of transparency in settings where employees' performance is subjectively evaluated. They also highlight an important boundary condition for leading by example, as we show that such attempts can backfire when managers work for their own benefit.

Keywords: Subjective performance evaluation, information acquisition costs, transparency, leading by example, signaling

JEL Classification: D91, M10, M40