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.
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.