Document Type

Discussion Paper

Publication Date

5-1-2016

CFDP Number

2041

CFDP Pages

26

Abstract

Reputation concerns can discipline agents to take costly effort and generate good outcomes. But what if outcomes are not always observed? We consider a model of reputation with shifting observability, and ask how this affects agents’ incentives. We identify a novel and intuitive mechanism by which infrequent observation or inattention can actually strengthen reputation incentives and encourage effort. If an agent anticipates that outcomes may not be observed in the future, the benefits from effort today are enhanced due to a “coasting” effect. By investing effort when outcomes are more likely observed, the agent can improve her reputation, and when the audience is inattentive in the future, she can coast on this reputation without additional effort. We show that future opportunities to rest on one’s laurels can lead to greater overall effort and higher efficiency than constant observation. This has implications for the design of review systems or performance feedback systems in organizations. We provide a characterization of the optimal observability structure to maximize efficient effort in our setting.

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