THE QUALITY OF INFORMATION AND INCENTIVES FOR EFFORT

Authors


  • *We thank Elchanan Ben-Porath, Asher Wolinsky, and seminar participants at Barcelona (JOCS), Boston University, Duke/UNC, and the Hebrew University for their helpful comments. Financial support from the Falk Institute for Economic Research is gratefully acknowledged.

Abstract

We study the relationship between the precision of information about the performance of an agent in a market, and the incentives this agent has for exerting effort to produce high quality. We show that this relationship can be nonmonotonic. There exists an efficient plausible equilibrium that induces a threshold beyond which any further improvement in the precision of information weakens the agent's incentive to produce high quality. Accordingly, both very accurate and very inaccurate signals about the agent's performance may destroy its incentive to exert effort. A few applications of this result are discussed.

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