Subjective Evaluations with Performance Feedback

This paper models two key roles of subjective performance evaluations: their incentive role and their feedback role. The paper shows that the feedback role makes subjective pay feasible even without repeated interaction, as long as there exists some veri…able measure of performance. It also shows that while subjective pay is helpful, it cannot achieve full e¢ ciency. However, fully e¢ cient incentives are achievable if the …rm can commit to a forced distribution of evaluations and employs a continuum of workers. With a small number of workers, a forced distribution is valuable only if the veri…able measure is poor. Keywords: Subjective Evaluations, Performance Feedback, Optimal Incentive Contracts JEL Classi…cation: D82, D86, M52 I thank Ricardo Alonso, Guy Arie, David Besanko, Odilon Camara, Bob Gibbons, Yuk-fai Fong, Jin Li, Tony Marino, John Matsusaka, Volker Nocke, Michael Raith, Heikki Rantakari, the seminar participants at Michigan State, Northwestern (Kellogg), and USC (Marshall), and the audiences at various conferences for helpful comments and suggestions. I have also bene…ted from discussions with Marco Ottaviani. The hospitality of the M&S Department at the Kellogg School of Management and the …nancial support provided by the SSHRC are gratefully acknowledged. a Department of Economics, Queen’s University, Kingston, Ontario K7L 3N6, Canada. E-mail: [email protected].