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Working paper

Biased Performance Evaluation in A Model of Career Concerns: Incentives versus Ex-Post Efficiency

I study a career concerns model in which the principal obtains information about the agent’s performance from an intermediary (evaluator), whose interests diverge from those of the principal. I show that, while the evaluator’s bias leads to ex-post suboptimal decisions regarding the agent (e.g., inefficient promotion or dismissal), it incentivizes the agent to exert more effort. As a result, generally, a non-zero bias is optimal. The optimal bias is “anti-agent” (“pro-agent”) when the agent is of high value (low value) for the principal from the ex-ante perspective. The magnitude of the optimal bias is increasing in the strength of the agent’s career concerns and decreasing in the degree of uncertainty about the agent’s ability. I also obtain that delegating decision rights to the evaluator may be preferred to communication when a sufficiently large bias is required to create incentives. I discuss applications of my results to promotion policies in organizations, evaluation of government programs and evaluation of CEOs by boards of directors.