No. 82: Transparency in hierarchies

Abstract

We examine how performance management practices that render employee accomplishments transparent in an organization depend on employees’ hierarchical level. We consider a principal-agent model of an organization where the principal contracts directly with a group of higher-level agent-workers and tasks an agent-manager to contract with a group of lower-level agent-workers. We portray performance transparency in terms of output precision and output observability by co-workers. We find that the optimal output precision for lower-level workers exceeds the optimal output precision for higher-level workers and we identify conditions where output observability is optimally restricted for lower-level workers. We also find that relative performance evaluation is less prevalent for lower-level workers. Collectively, our study contributes to the literature that documents the benefits and costs of transparency.

Participating Institutions

TRR 266‘s main locations are Paderborn University (Coordinating University), HU Berlin, and University of Mannheim. All three locations have been centers for accounting and tax research for many years. They are joined by researchers from LMU Munich, Frankfurt School of Finance and Management, WHU – Otto Beisheim School of Management, ESMT Berlin, Goethe University Frankfurt and Carl von Ossietzky University Oldenburg who share the same research agenda.