The Benefits of Limited Feedback in Organizations

• Authors: Stephen E. Hansen.
• BSE Working Paper: 109985 | September 15
• Keywords: Incentives , risk , Performance Appraisal , Career Concerns
• JEL codes: D82, D86, L20, M12
• Incentives
• risk
• Performance Appraisal
• Career Concerns

In most firms, managers periodically assess workers’ performance. Evidence suggests that managers with hold information during these reviews, and some observers argue that this necessarily reduces surplus. This paper assesses the validity of this argument when workers have career concerns. Disclosure has two effects: it exposes the worker to uncertainty about future effort levels, but allows him to use current effort to influence his employer’s beliefs about future effort. The surplus-maximizing disclosure policy reveals output realizations in the center of the distribution, but not in the tails. Thus, it is efficient for firms to reveal some but not all performance information.