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Morale Hazard

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Author Info

  • Hanming Fang

    (Cowles Foundation)

  • Giuseppe Moscarini

    ()

Abstract

We interpret workers' confidence in their own skills as their morale, and investigate the implication of worker overconfidence on the firm's optimal wage-setting policies. In our model, wage contracts both provide incentives and affect worker morale, by revealing private information of the firm about worker skills. We provide conditions for the non-differentiation wage policy to be profit-maximizing. In numerical examples, worker overconfidence is a necessary condition for the firm to prefer no wage differentiation, so as to preserve some workers' morale; the non-differentiation wage policy itself breeds more worker overconfidence; finally, wage compression is more likely when aggregate productivity is low.

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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1422.

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Length: 36 pages
Date of creation: May 2003
Date of revision:
Publication status: Published in Journal of Monetary Economics (May 2005), 52(4): 749-777
Handle: RePEc:cwl:cwldpp:1422

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Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA
Phone: (203) 432-3702
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Web page: http://cowles.econ.yale.edu/
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

Related research

Keywords: Overconfidence; Worker morale; Wage-setting policies;

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References

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  13. Fang, Hanming & Moscarini, Giuseppe, 2005. "Morale hazard," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 749-777, May.
  14. Olivier Compte & Andrew Postlewaite, 2004. "Confidence-Enhanced Performance," American Economic Review, American Economic Association, vol. 94(5), pages 1536-1557, December.
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