We study optimal contracting in a setting where a ﬁrm repeatedly interacts with multiple workers, and can compensate them based on publicly available performance signals as well as privately reported peer evaluations. If the evaluation and the eﬀort provision are done by diﬀerent workers (as in a supervisor/agent hierarchy), we show that, using both the private and public signals, the ﬁrst best can be achieved even in a static setting. However, if each worker is required to both exert eﬀort and report on his co-worker’s performance (as in a team setting), the worker’s eﬀort incentives cannot be decoupled from his truth-telling incentives. This makes the optimal static contract ineﬀicient and relational contracts based on the public signals increase eﬀiciency. In the optimal contract, it may be optimal to ignore signals that are informative of the worker’s eﬀort.
Deb, Joyee; Li, Jin; and Mukherjee, Arijit, "Relational Contracts with Subjective Peer Evaluations" (2015). Cowles Foundation Discussion Papers. 2427.