Publication Date: May 2016
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.
JEL Classification Codes: C73, D82, L14, L140