Dynamic performance evaluation with deadlines: The role of commitment

Abstract

We consider an environment in which a principal hires an agent and evaluates his productivity over time. The problem is embedded in a continuous‐time model with both hidden action and hidden information, where the principal must induce the agent to exert effort to facilitate her learning process. The value of committing to a deadline is examined in this environment, and factors which make the deadline more profitable are identified. Our framework generates a unique recursive equilibrium structure under no commitment which can be exploited to obtain a full characterization of the unique pure‐strategy equilibrium. The analysis allows us to evaluate the exact value of commitment for any given set of parameters and provides insight into when it is beneficial to commit to an evaluation deadline at the outset of a relationship.