DP11513 | Reputation with Opportunities for Coasting

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Reputation concerns can discipline agents and generate good outcomes. But what if outcomes are not always observed? Infrequent observation can strengthen reputation incentives and encourage effort. By exerting effort when outcomes are more likely observed, the agent can improve her reputation, and when the audience is inattentive in the future, she can ”coast” on this reputation without additional effort. Such opportunities to coast in the future can in fact lead to greater overall effort than constant observation. We characterize the optimal observability structure to maximize efficient effort. This has implications for the design of review systems or performance feedback systems.