THE QUALITY OF INFORMATION AND INCENTIVES FOR EFFORT

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 induce...

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Bibliographic Details
Published in:The Journal of industrial economics 2010-09, Vol.58 (3), p.642-660
Main Authors: MOAV, OMER, NEEMAN, ZVIKA
Format: Article
Language:English
Subjects:
Accuracy
Agency theory
Capital costs
Consumer economics
Efficient markets
Incentives
Industrial economics
Information
Information analysis
Information economics
Information precision
Market
Market equilibrium
Product development
Production costs
Production efficiency
Publishing industry
Quality standards
Studies
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Summary: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.
ISSN:0022-1821
1467-6451
DOI:10.1111/j.1467-6451.2010.00428.x