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Communicating Subjective Evaluations
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Communicating Subjective Evaluations

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  • Lang, Matthias

    (LMU Munich)

Abstract

Consider managers evaluating their employees\' performances. Should managers justify their subjective evaluations? Suppose a manager\'s evaluation is private information. Justifying her evaluation is costly but limits the principal\'s scope for distorting her evaluation of the employee. I show that the manager justifies her evaluation if and only if the employee\'s performance was poor. The justification assures the employee that the manager has not distorted the evaluation downwards. For good performance, however, the manager pays a constant high wage without justification. The empirical literature demonstrates that subjective evaluations are lenient and discriminate poorly between good performance levels. This pattern was attributed to biased managers. I show that these effects occur in optimal contracts without any biased behavior.

Suggested Citation

  • Lang, Matthias, 2018. "Communicating Subjective Evaluations," Rationality and Competition Discussion Paper Series 120, CRC TRR 190 Rationality and Competition.
    • Handle: RePEc:rco:dpaper:120
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    More about this item

    Keywords

    communication; justification; subjective evaluation; centrality; leniency; disclosure;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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