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Managing Intrinsic Motivation in a Long-Run Relationship

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  • Kfir Eliaz

    ()
    (Tel Aviv University, Eitan Berglas School of Economics
    University of Michigan, Economics Department)

  • Ran Spiegler

    ()
    (Tel Aviv University, Eitan Berglas School of Economics
    Centre for Macroeconomics (CFM))

Abstract

We study a repeated principal-agent interaction, in which the principal offers a "spot" wage contract at every period, and the agent’s outside option follows a Markov process with i.i.d shocks. If the agent rejects an offer, the two parties are permanently separated. At any period during the relationship, the agent is productive if and only if his wage does not fall below a "reference point" (by more than an infinitesimal amount), which is defined as his lagged-expected wage in that period. We characterize the game’s unique subgame perfect equilibrium. The equilibrium path exhibits an aspect of wage rigidity. The agent’s total discounted rent is equal to the maximal shock value.

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Bibliographic Info

Paper provided by Centre for Macroeconomics (CFM) in its series Discussion Papers with number 1414.

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Length: 11 pages
Date of creation: Jun 2014
Date of revision:
Handle: RePEc:cfm:wpaper:repec:cfm:wpaper:1414

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  1. Hanming Fang & Giuseppe Moscarini, 2004. "Morale Hazard," Yale School of Management Working Papers, Yale School of Management ysm386, Yale School of Management.
  2. Eliaz, Kfir & Spiegler, Rani, 2012. "Reference Dependence and Labor-Market Fluctuations," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8997, C.E.P.R. Discussion Papers.
  3. Olivier Compte & Andrew Postlewaite, 2004. "Confidence-Enhanced Performance," American Economic Review, American Economic Association, American Economic Association, vol. 94(5), pages 1536-1557, December.
  4. Geanakoplos, John & Pearce, David & Stacchetti, Ennio, 1989. "Psychological games and sequential rationality," Games and Economic Behavior, Elsevier, Elsevier, vol. 1(1), pages 60-79, March.
  5. Fehr, Ernst & Götte, Lorenz & Zehnder, Christian, 2008. "A Behavioral Account of the Labor Market: The Role of Fairness Concerns," IZA Discussion Papers 3901, Institute for the Study of Labor (IZA).
  6. Akerlof, George A, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 97(4), pages 543-69, November.
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