Performance Feedback with Career Concerns

Abstract

This article examines the incentive effects of interim performance evaluation when a worker has career concerns and effort is history dependent. Disclosure has two effects: it increases the variance of future effort, and it allows the worker to use current effort to influence his employer's belief about future effort, creating a ratchet effect. The article provides necessary and sufficient conditions for full disclosure to dominate no disclosure; shows that the optimal disclosure policy reveals output realizations in the center of the distribution, but not in the tails; and discusses the potential implications of the results for the analysis of performance appraisal systems. (JEL D82, D86, L20) The Author 2012. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oup.com, Oxford University Press.