Please use this identifier to cite or link to this item: http://hdl.handle.net/10125/64895

Measurement Error, Manipulation, and the Value of Ignoring Short-Term Performance

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dc.contributor.author Naomi Rothenberg
dc.date.accessioned 2019-12-06T18:38:13Z
dc.date.available 2019-12-06T18:38:13Z
dc.date.issued 2019-08-30
dc.identifier.uri http://hdl.handle.net/10125/64895
dc.description.abstract This paper studies the effect of measurement error and manipulation on a principal's preference for whether or not to use a short-term performance measure for firing an agent, whose competence is unknown. The short-term performance measure is an imperfect signal of the firm's unobservable long-term value, but is subject to manipulation, which, if successful, results in a favorable performance measure. A competent agent's successful manipulation is beneficial because it reduces inefficient firing, but an incompetent agent's successful manipulation is costly because of inefficient retention. A more informative signal about the competent agent's performance can either increase or decrease inefficient firing, depending on whether the agent's manipulation is successful. Thus, the principal prefers to ignore short-term performance when the signal about the competent agent's performance is neither accurate nor inaccurate. A more informative signal about the incompetent agent's performance can either increase or decrease inefficient retention, depending on whether the agent's manipulation is successful, and, thus, has a non-monotonic effect on the value of ignoring short-term performance. The results have implications for understanding how short-term performance evaluation can be detrimental to an organization's long-term value due to the costs of the firing and retention errors.
dc.subject performance evaluation
dc.subject measurement error
dc.subject manipulation
dc.subject job retention
dc.title Measurement Error, Manipulation, and the Value of Ignoring Short-Term Performance
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