Noisy Signals and Information Elicitation

This paper analyzes incentive and communication design in complex projects where workers possess private signals about early warning signs of failure. When compensation depends on noisy performance indicators, workers may hide adverse information. We characterize the firm’s optimal contract and communication protocol as functions of signal and assessment precision. Lower-quality private information requires effort distortions and weaker elicitation, reducing efficiency. More precise formal assessments can paradoxically lower profits by crowding out informal information sharing. The results highlight a trade-off between formal monitoring and informal communication in sustaining efficient project management and organizational performance.