ABSTRACT Much of the production in firms takes place over time. This paper seeks to understand the value of interim performance information on long projects. In particular, the model explores the sorting effects of performance evaluations. Conducting an interim performance evaluation increases efficiency by providing the option to end projects with low early returns. The main result: It is efficient to allocate more resources towards the end of a project. This result holds under a variety of scenarios: when the worker has unknown ability, when the outside options vary with output, and even under an agency framework with a risk‐averse agent.

It is a common practice for firms to conduct performance evaluations of their employees and yet to withhold this information from those employees. This paper argues that firms strategically withhold performance information to retain workers. In particular, if the worker enjoys high outside options and is tempted to quit, then the firm chooses not to reveal his performance information in order to keep him on the job. The firm's equilibrium strategy is to fire if performance is sufficiently low, reveal information if performance is sufficiently high, and withhold information otherwise. The pooling equilibrium is robust under a wide variety of settings, such as general cost functions, ability-contingent outside options, nonlinear contracts, nonverifiable output, and multiple stages of production.

We study how biases in financial reporting affect managers' incentives to develop innovative projects and to make appropriate investment decisions. Conservative reporting practices impose stricter verification standards for recognizing good news, and reduce the chance that risky innovations will lead to favorable future earnings reports. Holding all else constant, more conservative reporting therefore weakens the manager's incentive to work on innovative ideas, consistent with informal arguments in the extant literature. However, all else does not stay constant because the manager's pay plan will change in response to changes in the accounting system. We show that under optimal contracting, more conservative accounting does not stifle innovation in organizations, but rather increases incentives for innovation, as long as conservatism reduces the risk of an overstatement.

Venture capitalists deliver investments to entrepreneurs in stages. This paper shows staged financing is efficient. Staging lets investors abandon ventures with low early returns, and thus sorts good projects from bad. The primary implication from staging is that it is efficient to invest more in later rounds. The model yields a number of predictions on how the ratio of early to late round financing varies with uncertainty, the outside options of both parties, the value of the venture, the costs of investment, and project difficulty. We test these predictions against data on venture capital financings and find significant empirical support for the theory.

We formulate and analyze a model of team structure and monitoring within a Linear-Exponential-Normal (LEN) agency framework. We incorporate three key instruments in the internal design of an organization involving team production: team size, monitoring activities, and incentive contracts. We show that the complex tradeoffs among these instruments lead to surprisingly simple implications. One such result is that the equilibrium level of pay-for-performance for workers is attenuated and is, at times, invariant to most environmental variables of interest. As such, our model helps explain the empirical puzzle of the lack of a trade-off for risk/incentives shown in standard agency models. Our work also demonstrates the presence of complementarities between team size and monitoring, and between worker talent and managerial monitoring ability. Finally, we derive predictions about the impact of environmental variables on the choice of optimal team size, incentives, and employee quality, even in the presence of an external marketplace for talent.