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Inducing Effort Through Grades

Author

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  • David Rodina
  • John Farragut

Abstract

We study the problem of a principal who wants to incentivize an agent's investment in productivity through an information disclosure policy. The agent participates in a market and benefits from an improved perception of his productivity. Under asymmetric information about the agent's ability we explore how qualitative features of the optimal deterministic grading scheme depend on the distribution of the agent's ability. Perhaps surprisingly, random grades can induce higher investment. When the effect of the agent's investment is subject to exogenous shocks and there is no asymmetric information, in a wide variety of circumstances the optimal disclosure policy has a relatively simple threshold form.

Suggested Citation

  • David Rodina & John Farragut, 2020. "Inducing Effort Through Grades," CRC TR 224 Discussion Paper Series crctr224_2020_221, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2020_221
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp221
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    Cited by:

    1. Gerardi, Dino & Grillo, Edoardo & Monzón, Ignacio, 2022. "The perils of friendly oversight," Journal of Economic Theory, Elsevier, vol. 204(C).

    More about this item

    Keywords

    Information Design;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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