The Appeals Process in Principal–Agent Relationships

The appeals process is employed in many organizations, including administrative agencies, regulatory authorities, sports organizations, and private companies. This paper examines the dual role of the appeals process in correcting errors and inducing compliance in principal-agent relationships in the presence of imperfect performance evaluation. Some surprising results emerge. For example, appeals may be denied even if the appeals process is quite accurate and costless. An increased accuracy of initial observation may reduce welfare. Furthermore, welfare can increase as the cost of the appeals process increases.