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Information Revelation in Relational Contracts

Author

Listed:
  • Yuk-Fai Fong
  • Jin Li

Abstract

We explore subjective performance reviews in long-term employment relationships. We show that firms benefit from separating the task of evaluating the worker from the task of paying him. The separation allows the reviewer to better manage the review process, and can, therefore, reward the worker for his good performance with not only a good review contemporaneously, but also a promise of better review in the future. Such reviews spread the reward for the worker’s good performance across time and lower the firm’s maximal temptation to renege on the reward. The manner in which information is managed exhibits patterns consistent with a number of well-documented biases in performance reviews.

Suggested Citation

  • Yuk-Fai Fong & Jin Li, 2017. "Information Revelation in Relational Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(1), pages 277-299.
    • Handle: RePEc:oup:restud:v:84:y:2017:i:1:p:277-299.
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    File URL: http://hdl.handle.net/10.1093/restud/rdw035
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    Citations

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    Cited by:

    1. Johannes Hörner & Nicolas S Lambert, 2021. "Motivational Ratings [Toward the Next Generation of Recommender Systems: A Survey of the State-of-the-Art and Possible Extensions]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(4), pages 1892-1935.
    2. Li, Jin & Powell, Michael, 2020. "Multilateral interactions improve cooperation under random fluctuations," Games and Economic Behavior, Elsevier, vol. 119(C), pages 358-382.
    3. Jonathan Glover & Eunhee Kim, 2021. "Optimal Team Composition: Diversity to Foster Implicit Team Incentives," Management Science, INFORMS, vol. 67(9), pages 5800-5820, September.
    4. Li, Jin & Mukherjee, Arijit & Vasconcelos, Luis, 2019. "Managing performance evaluation systems: Relational incentives in the presence of learning-by-shirking," Working Papers 2018-12, Michigan State University, Department of Economics.

    More about this item

    Keywords

    Relational contract; Information;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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