Career Concerns and Mandated Disclosure

Abstract

This paper examines the effects of mandated disclosure on the design of contracts and induced behavior in the presence of career concerns. We analyze the impact of two key properties of a mandated performance measure that is publicly disclosed: its sensitivity to the agent's effort and its informativeness about the agent's ability. We find that when the mandated measure is highly sensitive to the agent's effort but the measure is relatively uninformative about the agent's ability, the agent's effort (and the firm's output) will be higher and the pay-for-performance sensitivity will be lower relative to a scenario in which the measure is not mandated. In contrast, if the mandated measure's informativeness dominates the measure's sensitivity to effort, then effort is lower and the pay-for-performance sensitivity is higher in the mandated setting. We also characterize settings where a mandated disclosure would be desirable or not; variations arise because mandated disclosures can increase both effort and risk. Our results imply that mandating the public disclosure of performance measures, particularly measures that are relatively informative about ability but are difficult to influence through managerial effort, may have the unintended consequence of generating inefficiencies in firms' employment contracts.

Keywords: career concerns, mandated disclosure, multi-period models, implicit incentives

JEL Classification: M41, M52