The appeals process in principal-agent relationships

The appeals process is employed in many organizations including administrative agencies, regulatory authorities, sports organizations, and private companies. This paper examines the dual role of the appeals process in enhancing fairness and inducing performance in principal-agent relationships in the presence of imperfect performance evaluation. Some surprising results emerge. For example, the merit of the appeals process depends on the agent's aversion to unfairness, and appeals may be optimally denied even if the appeals process is more accurate than the initial evaluation and is costless. An increase in the accuracy of the initial evaluation may reduce the principal's welfare. Furthermore, the principal's welfare can increase as the cost of the appeals process increases. (C) 2009 Elsevier B.V. All rights reserved.