Performance Measurement and Information Production

When performance measures are used for evaluation purposes, agents have some incentives to learn how their actions affect these measures. We show that the use of imperfect performance measures can cause an agent to devote too many resources (too much effort) to acquiring information. Doing so can be costly to the principal, because the agent can use information to game the performance measure to the detriment of the principal. We analyze the effect of endogenous information acquisition on the optimal incentive strength and the quality of the performance measure used.