The Effect of Imprecise Information on Incentives and Team Production
Posted: 7 Aug 2009 Last revised: 3 Jul 2014
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The Effect of Imprecise Information on Incentives and Team Production
The Effect of Imprecise Information on Incentives and Team Production
Date Written: August 6, 2009
Abstract
This paper links the quality (i.e. noise and bias) of productivity information and of performance measures to the organizational choice of whether or not production should occur in teams. Incentives and performance evaluation are affected by the quality of accounting information and are fundamental in the determination of organizational design. Agents have private, pre-decision information about productivity and performance is measured with both error and bias. With a perfect, private signal, agents earn informational rents, and team production is more costly because of higher productivity and thus higher rents than agents who work individually. Teams are preferred when the productivity signal is imprecise enough because with less information, agents’ rents are reduced. More importantly, the threshold of the level of precision in the productivity signal for which teams are preferred depends inversely on the amount of error in the performance measure. Increasing noise in the performance measure results in a decreased chance of reporting the high output, which reduces agents’ rents, and makes teams less costly. Further, the impact of a biased performance measurement system depends on the precision and the direction of the bias, either conservative or liberal. Increasing or changing the direction of the bias can increase the precision of the performance measure, making teams more costly. The results suggest the importance of considering the impact of the quality of information in choosing how to organize production and show that an imprecise performance measure can reduce agent’s information rents and substitute for reducing the agent’s private information.
Keywords: principal-agent, teams, organizational design, pre-decision information, measurement error
JEL Classification: D82, J41, L23, M41
Suggested Citation: Suggested Citation