The Downsides of Managerial Oversight in Signaling Environments

This paper studies the interplay between a worker's signaling incentives and costly managerial oversight. The worker is privately informed about his ability. Ability affects the marginal return from effort, which is an observable choice. Contrary to the logic of oversight, the firm would benefit from committing not to acquire any information precisely when it is most uncertain about the worker's ability. Managerial oversight weakens incentives because signaling and oversight are strategic substitutes for the worker. Yet, effort decisions are distorted upward. The model explains unpaid overtime and presenteeism in the workplace while warning about the unintended consequences of common managerial practices