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Performance pay and dynamic social preferences

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  • Kvaløy, Ola

Abstract

This paper analyzes implications of dynamic social preferences in a simple multiagent moral hazard model. The basic assumption is that social (other-regarding) preferences, such as shame and compassion, is a function of previously offered incentive schemes. I show that it may be optimal to offer incentives based on relative performance evaluation (RPE) in both periods in the dynamic (two-period) setting, even if team incentives, i.e. joint performance evaluation (JPE) is optimal in the static setting, and vice versa. The model also suggests that dynamic preferences promote the use of JPE or RPE at the expense of independent performance evaluation (IPE) if the principal cannot use IPE to boost social preferences.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Psychology.

Volume (Year): 31 (2010)
Issue (Month): 4 (August)
Pages: 698-704

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Handle: RePEc:eee:joepsy:v:31:y:2010:i:4:p:698-704

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Web page: http://www.elsevier.com/locate/joep

Related research

Keywords: Performance pay Multiagent moral hazard Social preferences;

References

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  1. Hideshi Itoh, 2004. "Moral Hazard and Other-Regarding Preferences," The Japanese Economic Review, Japanese Economic Association, vol. 55(1), pages 18-45.
  2. Gary Charness & Matthew Rabin, 2003. "Understanding Social Preferences with Simple Tests," General Economics and Teaching 0303002, EconWPA.
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  13. Dominique Demougin & Claude Fluet, 2003. "Inequity Aversion in Tournament," CIRANO Working Papers 2003s-18, CIRANO.
  14. Samuel Bowles, 1998. "Endogenous Preferences: The Cultural Consequences of Markets and Other Economic Institutions," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 75-111, March.
  15. Christian Grund & Dirk Sliwka, 2002. "Envy and Compassion in Tournaments," Bonn Econ Discussion Papers bgse32_2002, University of Bonn, Germany.
  16. Kandel, E. & Lazear, E.P., 1990. "Peer Pressure and Partnerships," Papers 90-07, Rochester, Business - Managerial Economics Research Center.
  17. Burks, Stephen V. & Carpenter, Jeffrey P. & Götte, Lorenz, 2006. "Performance Pay and the Erosion of Worker Cooperation: Field Experimental Evidence," IZA Discussion Papers 2013, Institute for the Study of Labor (IZA).
  18. Malcomson, James M, 1984. "Work Incentives, Hierarchy, and Internal Labor Markets," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 486-507, June.
  19. Joel M. Guttman, 2003. "Repeated interaction and the evolution of preferences for reciprocity," Economic Journal, Royal Economic Society, vol. 113(489), pages 631-656, 07.
  20. Jonathan Levin, 2002. "Multilateral Contracting And The Employment Relationship," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 1075-1103, August.
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Cited by:
  1. Kidd, Michael & Nicholas, Aaron & Rai, Birendra, 2013. "Tournament outcomes and prosocial behaviour," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 387-401.

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