Biased Performance Evaluation in A Model of Career Concerns: Incentives versus Ex-Post E¢ ciency

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., ine¢ cient promotion or dismissal), it incentivizes the agent to exert more e¤ort. 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 su¢ ciently 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. JEL classi…cation: D82, D83, M51