No. 82: Transparency in hierarchies

We examine how performance management practices that render employee accomplishments transparent in an organization depend on employees’ hierarchical level. We consider a principal-agent model of an organization where the principal contracts directly with a group of higher-level agent-workers and tasks an agent-manager to contract with a group of lower-level agent-workers. We portray performance transparency in terms of output precision and output observability by co-workers. We find that the optimal output precision for lower-level workers exceeds the optimal output precision for higher-level workers and we identify conditions where output observability is optimally restricted for lower-level workers. We also find that relative performance evaluation is less prevalent for lower-level workers. Collectively, our study contributes to the literature that documents the benefits and costs of transparency.