Delegating performance evaluation

Igor Letina, Shuo Liu, Nick Netzer

We study optimal incentive contracts with multiple agents when performance is evaluated by 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 fixes 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 various applications, such as the design of worker compensation or the allocation of research grants.

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Year of publication:	2020
Authors:	Letina, Igor ; Liu, Shuo ; Netzer, Nick
Published in:	Theoretical economics : TE ; an open access journal in economic theory. - Toronto : [Verlag nicht ermittelbar], ISSN 1555-7561, ZDB-ID 2220447-7. - Vol. 15.2020, 2, p. 477-509
Subject:	Subjective performance evaluation \| mechanism design without money \| optimal delegation \| optimality of contests \| Mechanismus-Design-Theorie \| Mechanism design \| Prinzipal-Agent-Theorie \| Agency theory \| Auktionstheorie \| Auction theory \| Kooperative Führung \| Participative leadership