The Quality of Information and Incentives for Effort
Hebrew University Working Paper No. 2005-01
24 Pages Posted: 20 Jan 2005
Date Written: January 2005
We study the relationship between the precision of information about the performance of an agent in a market, and the incentives this agent has for exerting effort to produce high quality. We show that this relationship is not monotonic. There exists a threshold beyond which any further improvement in the precision of information weakens the agent's incentive to produce high quality. Accordingly, both very precise and very imprecise information about the agent's performance may destroy its incentive to exert effort. A few applications of this result are discussed.
Keywords: Reputation, incentives, precision of information, experience good, credence good
JEL Classification: D82, L15
Suggested Citation: Suggested Citation