Feedback Design in Dynamic Moral Hazard

We study the joint design of dynamic incentives and performance feedback for an environment with a coarse (all-or-nothing) measure of performance, and show that hiding information from the agent can be an optimal way to motivate effort. Using a novel approach to incentive compatibility, we derive a two-phase solution that begins with a “silent phase” where the agent is given no feedback and is asked to work non-stop, and ends with a “full-transparency phase” where the agent stops working as soon as a performance threshold is met. Hiding information leads to greater effort, but an ignorant agent is also more expensive to motivate. The two-phase solution—where the agent's ignorance is fully frontloaded—stems from a “backward compounding effect” that raises the cost of hiding information as time passes.