Subjective evaluation and information-efficiency in organizations

Subjective performance evaluation is modeled as auditing without commitment. A superior, who has to decide whether an where to audit the work done by a subordinate, takes into account all interim information he has obtained in the meantime. This invites workers to cover up and withhold information in order tomake an audit more difficult and thus divert their superior from making one. Weshow that this strategy usually raises the cost of setting work incentives, so that incentives are softened. However, in some instances the opposite holds. When worker's on-the-job information is valuable for entrepreneurial decisions, work incentives have to be softened in order improve the internal flow of information.