A principal owns a firm, hires an agent of uncertain productivity, and designs a dynamic policy for evaluating his performance. The agent observes ongoing evaluations and decides when to quit. When not quitting, the agent is paid a wage that is linear in his expected productivity; the principal claims the residual performance. After quitting, the players secure fixed outside options. I show that equilibrium is Pareto efficient. For a broad class of performance technologies, the equilibrium wage deterministically grows with tenure. My analysis suggests that endogenous performance evaluation plays an important role in shaping careers in organizations.
"Dynamic Evaluation Design."
American Economic Journal: Microeconomics,
Firm Behavior: Theory
Asymmetric and Private Information; Mechanism Design
Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
Human Capital; Skills; Occupational Choice; Labor Productivity
Wage Level and Structure; Wage Differentials
Personnel Economics: Firm Employment Decisions; Promotions