An economic analysis of performance feedback - Theory and experimental evidence

Many psychological studies provide evidence that performance feedback has an impact on employee motivation. In this paper we use economic methods to examine the role of performance feedback in employer-employee relationships. First, we analyze the effect of feedback on the employee's effort decision in a simple 2-period model. Second, we test the resulting hypotheses in an economic laboratory experiment. The theoretical results imply that the introduction of performance feedback leads to (1) an effort adjustment in the second period, (2) higher utility for the employee and (3) higher expected total output. The experimental data confirm the theoretical results to a large extent. Thus, the introduction of performance feedback indeed affects the employee's effort choice although the compensation function remains unchanged.