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We examine the impact of identity preferences on the interrelation between incentives and performance measurement. In our model, a manager identifies with an organization and loses utility to the extent that his actions conflict with effort-standards issued by the principal. Contrary to prior arguments in the literature, we find conditions under which a manager who identifies strongly with the organization receives stronger incentives and faces more performance evaluation reports than a manager who does not identify with the organization. Our theory predicts that managers who experience events that boost their identification with the firm can decrease their effort in short-term value creation. We also find that firms are more likely to employ less precise but more congruent performance measures, such as stock prices, when contracting with managers who identify little with the organization. In contrast, they use more precise but less congruent measures, such as accounting earnings, when contracting with managers who identify strongly with the firm.

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We analyse information flows in a profit-centre organisation with internal trade between two risk-neutral divisions. Prior to production, the divisions make unverifiable investments in intrafirm synergies. After investments are made, the selling division announces a cost-based transfer price which includes a mark-up on variable costs. The buying division then decides what quantity to purchase at that unit cost. From the head office's perspective, the key issues are to influence both, divisional investments and the seller's manipulation of the mark-up. To do so, the head office can fund a pre-decision information system bef ore divisional investments are made. The system produces forward-looking information that can be used to improve the divisions' investments decisions, but which cannot be used in evaluating their performance. Our analytical framework allows us to identify cost and revenue structures for which pre-decision information either supports or destroys intrafirm synergies by motivating or discouraging divisional investments, thereby resulting in an increase in, decrease in, or in no impact whatsoever on, firm profit. Among our most interesting findings is the counterintuitive result that pre-decision information can undermine the incentives of risk-neutral agents to invest specifically. Our results add to earlier agency models that found different, albeit equally dysfunctional effects of pre-decision information. Contrary to these studies, our findings are not driven by either risk aversion or rent extraction.