Performance Evaluations and Efficient Sorting

<heading id="h1" level="1" implicit="yes" format="display">ABSTRACT</heading>Much of the production in firms takes place over time. This paper seeks to understand the value of interim performance information on long projects. In particular, the model explores the sorting effects of performance evaluations. Conducting an interim performance evaluation increases efficiency by providing the option to end projects with low early returns. The main result: It is efficient to allocate more resources towards the end of a project. This result holds under a variety of scenarios: when the worker has unknown ability, when the outside options vary with output, and even under an agency framework with a risk-averse agent. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2007.