Information Management and Incentives

Authors


  • The authors thank Daniel Spulber, an associate editor, two anonymous referees, as well as Estelle Cantillon, Peter Ove Christensen, Julio Davila, Mathias Dewatripont, Guido Friebel, Hans Frimor, Paul Heidhues, Ian Jewitt, Georg Kirchsteiger, Alexander Koch, Patrick Legros, Sandra Ludwig, Margaret Meyer, Burkhard Schipper, and Urs Schweizer for valuable comments and discussions. Part of this research was conducted while the first author visited the IDEI in Toulouse and Nuffield College, University of Oxford. She thanks these institutions for their kind hospitality.

Abstract

We ask how the incentives of an agent are affected by an information management system that lets the agent receive information about the performance of a colleague before (“transparent firm”) rather than after he provides effort (“nontransparent firm”). Transparency is detrimental for incentives if the performance of the colleague provides information on the relative impact of the agent’s effort on his success probability. The findings imply that firms in which comparisons between employees play a minor role for compensation are transparent. Firms in which they play a major role sometimes choose to be nontransparent despite the flexibility gains transparency provides.

Ancillary