Subjective Performance Evaluation and Inequality Aversion

Many firms use subjective performance appraisal systems due to lack of objectiveperformance measures. In these cases, supervisors usually have to rate the performance oftheir subordinates. Using such systems, it is a well established fact that many supervisorstend to assess the employees too good (leniency bias) and that the appraisals hardly varyacross employees of a certain supervisor (centrality bias). We explain these two biases in amodel with a supervisor, who has preferences for the utility of her inequality aversesubordinates, and discuss determinants of the size of the biases. Extensions of the basicmodel include the role of supervisor’s favoritism of one particular agent and the endogenouseffort choice of agents. Whether inequality averse agents exert higher efforts then purely selforientedones, depends on the size of effort costs and inequality aversion.[...]