Coarse performance evaluation for envious agents

Abstract Information economics predicts that a principal will prefer a finer performance evaluation system to a coarser one. Nevertheless, coarse performance evaluation is often used in practice. To explain this seeming contradiction, I construct a model of a principal and envious agents. I show that a coarse evaluation system can do as well as a finer one if agents are sufficiently envious, that is, if they incur large utility loss when they are paid less than their peers. This result supports the use of coarse performance evaluation that aggregates signals of good performance, in the form of fixed wages or inflated ratings.