Delegating Performance Evaluation

Igor Letina (University of Zurich)
Shuo Liu (University of Zurich)
Nick Netzer (University of Zurich)

Abstract: We study optimal incentive contracts with multiple agents when performance eval- uation is delegated to a reviewer. The reviewer may be biased in favor of the agents, but the degree of the bias is unknown to the principal. We show that a contest, which is a contract in which the principal determines a set of prizes to be allocated to the agents, is optimal. By using a contest, the principal can commit to sustaining incentives despite the reviewer’s potential leniency bias. The optimal effort profile can be uniquely implemented by a modified all-pay auction, and it can also be implemented by a nested Tullock contest. Our analysis has implications for applications as diverse as the design of worker compensation, the awarding of research grants, and the allocation of foreign aid.

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