Abstract
Feedback provision and salary administration are usually two indispensable purposes of conducting performance evaluations. However, the real role that performance feedback plays is affected by the availability of other appraisals that reveal information about the causes of performance. We develop a two-stage principal-agent model where, at the end of the first stage, the principal can choose to evaluate the interim performance, or the first-stage agent's ability that was previously unknown to any party, or both, and use the results to determine whether the original agent is rehired in the second stage, as well as the compensation. We find that the presence of an ability appraisal undermines the principal's credibility in the subjective evaluation of interim performance, and prohibits a renegotiation-proof contract from being written contingent upon subjective performance feedback.
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