Transparency and Performance Evaluation in Sequential Agency

This study investigates the effects of transparency in a sequential moral hazard problem, where a leader and a follower consecutively take an action. The principal chooses whether the organization is transparent or opaque, by which we mean that the action of the leader is observable to the follower or not. Compared to the opaque organization, the transparent organization imposes an additional incentive constraint on the follower but may relax the incentive constraint on the leader. Informativeness of the signal crucially affects the optimal degree of transparency as well as the optimal incentive scheme. The transparent (resp. opaque) organization tends to be preferred when the optimal incentive contract exhibits joint (resp. relative) performance evaluation