In many workplaces co-workers have the best information about each other's effort. Managers may attempt to exploit this information through peer evaluation. I study peer evaluation in a pure moral hazard model of production by two limitedly liable agents. Agents receive a signal about their colleague's effort level, and are asked to report it to the principal. The principal may give an individual bonus for the receipt of a positive evaluation by a colleague, which stimulates effort as long as signals are revealed truthfully. A cost of lying ascertains that there can be truthful revelation. I show that interpersonal relations between colleagues constrain the bonus for receiving a positive evaluation in order to keep evaluations truthful. Still, the principal will always include such a bonus in the optimal contract, and possibly complement it with a team bonus. Co-worker relations have non-monotic effects on profits in the optimal contract.

co-workers relations, incentive contracts, likeability bias, peer appraisal, peer evaluation
Economics of Contract Law (jel D86), Compensation Packages; Payment Methods (jel J33), Personnel Economics: General (jel M50)
Tinbergen Institute
hdl.handle.net/1765/19650
Tinbergen Institute Discussion Paper Series
Discussion paper / Tinbergen Institute
Tinbergen Institute

Sol, J. (2010). Peer Evaluation: Incentives and Co-Worker Relations (No. TI-055/1). Discussion paper / Tinbergen Institute (pp. 1–27). Tinbergen Institute. Retrieved from http://hdl.handle.net/1765/19650