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Abstract

Consider managers evaluating their employees’ performances. Should managers justify their subjective evaluations? Suppose a manager’s evaluation is private information. Justifying her evaluation is costly but limits the principal’s scope for distorting her evaluation of the employee. I show that the manager justifies her evaluation if and only if the employee’s performance was poor. The justification assures the employee that the manager has not distorted the evaluation downwards. For good performance, however, the manager pays a constant high wage without justification. The empirical literature demonstrates that subjective evaluations are lenient and discriminate poorly between good performance levels. This pattern was attributed to biased managers. I show that these effects occur in optimal contracts without any biased behavior.