Communicating Subjective Evaluations

Consider managers evaluating their employees’ performance. Should managers justify their subjective evaluations? To answer this question, I study justifications: Suppose a manager’s evaluation is private information. To justify her evaluation, she can gather additional information that allows the agent to partially cross-check the evaluation. I show that the manager justifies her evaluation if and only if the evaluation indicates bad performance. The justification assures the employee that the manager has not distorted the evaluation downwards. For good performances, however, the manager pays a constant high wage without justification. Empirical literature demonstrates that subjective evaluations discriminate poorly between good performances. This pattern was attributed to biased managers. I show that these effects occur in optimal contracts without any biased behavior.