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Positive Self-image and Incentives in Organisations

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  • Luís Santos-Pinto

Abstract

This paper investigates the implications of workers' mistaken beliefs about their abilities on incentives in organisations. It shows that if effort is observable, then an agent's mistaken beliefs about his own ability are favourable to the principal. However, when effort is unobservable an agent's mistaken beliefs about his own ability can be either favourable or unfavourable to the principal. The article provides conditions under which an agent's overestimation about his own ability is favourable to the principal when effort is unobservable. The article shows that workers' mistaken beliefs about their co-workers' abilities make interdependent incentive schemes more attractive to firms than individualistic ones. Copyright (C) The Author(s). Journal compilation (C) Royal Economic Society 2008.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 118 (2008)
Issue (Month): 531 (08)
Pages: 1315-1332

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Handle: RePEc:ecj:econjl:v:118:y:2008:i:531:p:1315-1332

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References

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  1. Hvide, Hans K., 2002. "Pragmatic beliefs and overconfidence," Journal of Economic Behavior & Organization, Elsevier, vol. 48(1), pages 15-28, May.
  2. Hanming Fang & Giuseppe Moscarini, 2003. "Morale Hazard," Cowles Foundation Discussion Papers 1422, Cowles Foundation for Research in Economics, Yale University.
  3. Rabin, Matthew, 1997. "Psychology and Economics," Department of Economics, Working Paper Series qt8jd5z5j2, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  4. Mookherjee, Dilip, 1984. "Optimal Incentive Schemes with Many Agents," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 433-46, July.
  5. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
  6. Menkhoff, Lukas & Schmidt, Ulrich & Brozynski, Torsten, 2006. "The impact of experience on risk taking, overconfidence, and herding of fund managers: Complementary survey evidence," European Economic Review, Elsevier, vol. 50(7), pages 1753-1766, October.
  7. Baker, George P & Jensen, Michael C & Murphy, Kevin J, 1988. " Compensation and Incentives: Practice vs. Theory," Journal of Finance, American Finance Association, vol. 43(3), pages 593-616, July.
  8. Roland Benabou & Jean Tirole, 2003. "Intrinsic and Extrinsic Motivation," Review of Economic Studies, Wiley Blackwell, vol. 70(3), pages 489-520, 07.
  9. Thomas Oberlechner & Carol Osler, 2009. "Overconfidence in Currency Markets," Working Papers 02, Brandeis University, Department of Economics and International Businesss School.
  10. de la Rosa, Leonidas Enrique, 2011. "Overconfidence and moral hazard," Games and Economic Behavior, Elsevier, vol. 73(2), pages 429-451.
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Citations

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Cited by:
  1. Sloof, Randolph & van Praag, C. Mirjam, 2010. "The effect of noise in a performance measure on work motivation: A real effort laboratory experiment," Labour Economics, Elsevier, vol. 17(5), pages 751-765, October.
  2. Sandra Ludwig & Julia Nafziger, 2011. "Beliefs about overconfidence," Theory and Decision, Springer, vol. 70(4), pages 475-500, April.
  3. Sarah Auster, 2012. "Asymmetric Awareness and Moral Hazard," Economics Working Papers ECO2012/23, European University Institute.
  4. Legge, Stefan & Schmid, Lukas, 2013. "Rankings, Random Successes, and Individual Performance," Economics Working Paper Series 1340, University of St. Gallen, School of Economics and Political Science.
  5. Donald Cox & Beth J. Soldo, 2004. "Motivation for Money and Care that Adult Children Provide for Parents: Evidence from "Point-Blank" Survey Questions," Working Papers, Center for Retirement Research at Boston College 2004-17, Center for Retirement Research.
  6. Ludwig, Sandra & Wichardt, Philip C. & Wickhorst, Hanke, 2011. "On the Positive Effects of Overcon fident Self-Perception in Teams," Discussion Papers in Economics 12246, University of Munich, Department of Economics.
  7. Sarah Auster, 2011. "Asymmetric Awareness and Moral Hazard," Economics Working Papers ECO2011/, European University Institute.
  8. Auster, Sarah, 2013. "Asymmetric awareness and moral hazard," Games and Economic Behavior, Elsevier, vol. 82(C), pages 503-521.
  9. Leonidas Enrique De La Rosa, 2008. "Overconfidence in a Career-Concerns Setting," CESifo Working Paper Series 2405, CESifo Group Munich.
  10. Jean-Louis Rullière & Luis Santos Pinto & Isabelle Vialle, 2011. "Self-Confidence and Teamwork : An Experimental Test," Post-Print halshs-00632091, HAL.
  11. Anja Sautmann, 2011. "Contracts for Agents with Biased Beliefs: Some Theory and an Experiment," Working Papers 2011-10, Brown University, Department of Economics.
  12. Thoma, Carmen, 2013. "Is Underconfidence Favored over Overconfidence? An Experiment on the Perception of a Biased Self-Assessment," Discussion Papers in Economics 17460, University of Munich, Department of Economics.
  13. Philipp Weinschenk, 2010. "Moral Hazard and Ambiguity," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2010_39, Max Planck Institute for Research on Collective Goods.
  14. Sandra Ludwig & Julia Nafziger, 2007. "Do You Know That I Am Biased? An Experiment," Bonn Econ Discussion Papers bgse11_2007, University of Bonn, Germany.

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