Managing Intrinsic Motivation in a Long-Run Relationship
AbstractWe 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 InfoPaper provided by Centre for Macroeconomics (CFM) in its series Discussion Papers with number 1414.
Length: 11 pages
Date of creation: Jun 2014
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-07-21 (All new papers)
- NEP-CBE-2014-07-21 (Cognitive & Behavioural Economics)
- NEP-CTA-2014-07-21 (Contract Theory & Applications)
- NEP-HPE-2014-07-21 (History & Philosophy of Economics)
- NEP-HRM-2014-07-21 (Human Capital & Human Resource Management)
- NEP-MIC-2014-07-21 (Microeconomics)
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