Subjective Performance Evaluations, Collusion, and Organizational Design

Abstract

Many scholars have emphasized the importance of subjective performance evaluations in employment relationships to provide employees with effort incentives. This article examines when delegating subjective appraisals to managers is optimal. Delegation facilitates more accurate performance evaluations but can also lead to collusion. To prevent collusive behavior, I show that firms need to reduce effort incentives for employees and leave managers with economic rents through higher compensations. Despite these costs of preventing collusion, I find that delegation can be optimal. The Author 2011. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: [e-mail], Oxford University Press.