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Dynamic Evaluation Design

  • Alex Smolin
American Economic Journal: Microeconomics
vol. 13, no. 4, November 2021
(pp. 300-331)
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Abstract

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.

Citation

Smolin, Alex. 2021. "Dynamic Evaluation Design." American Economic Journal: Microeconomics, 13 (4): 300-331. DOI: 10.1257/mic.20170405

Additional Materials

JEL Classification

  • D21 Firm Behavior: Theory
  • D82 Asymmetric and Private Information; Mechanism Design
  • D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
  • J24 Human Capital; Skills; Occupational Choice; Labor Productivity
  • J31 Wage Level and Structure; Wage Differentials
  • J41 Labor Contracts
  • M51 Personnel Economics: Firm Employment Decisions; Promotions
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