Optimal Feedback and Wage Policies∗

We consider a principal-agent setting in which the principal has superior expertise to assess performance of the agent. The agent, if capable and making an effort, generates successes exponentially distributed over time. The principal observes successes and may disclose them to the agent via (i) a feedback policy, if transfers are not allowed, or (ii) a wage policy, if transfers are allowed. We solve for principal’s optimal policies and find that they are coarse in both cases; the principal postpones revealing information about the agent’s performance. When transfers are not allowed, the optimal feedback policy prescribes a single revision at a fixed date; it leaves the agent with procrastination rents when his actions are not observable. When transfers are allowed, the optimal wage policy starts with a probation period that is followed by permanent employment if the agent has ever been successful; it satisfies limited liability and extracts full surplus even when agent’s actions are not observable.