Leniency, Status and Output Informativeness

Abstract

The article identifies the condition under which it is beneficial for the principal to be a lenient performance evaluator towards his/her favourite agent. It provides the game theoretic foundation behind the decision of choosing leniency (biased) over stringency (fair). The emergence of an influential literature captures the different aspects of status as a non-monetary incentive and its significance in organisational theory. However, the interplay between status and evaluation system has not been studied much. The article is built over an article by Dey and Banerjee (2014a) to understand the role of status incentive with the leniency of evaluation. Analysis of the interplay between status and leniency shows that when status is valued more, the principal benefits from this form of biasness. Interestingly, this article also provides a linkage between informativeness of output signal with this form of biasness. Using moral hazard framework with limited liability in a discrete effort framework, it is suggested that a weak output signal can act as an instrument in reducing the emergence of a lenient evaluation. JEL: D86, L14, L20