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Social Relations and Relational Incentives

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  • Robert Dur

    (Erasmus University Rotterdam, CESifo, and IZA)

  • Jan Tichem

    (Erasmus University Rotterdam)

Abstract

This paper studies how social relationships between managers and employees affect relational incentive contracts. To this end we develop a simple dynamic principal-agent model where both players may have feelings of altruism or spite toward each other. The contract may contain two types of incentives for the agent to work hard: a bonus and a threat of dismissal. We find that good social relationships undermine the credibility of a threat of dismissal but strengthen the credibility of a bonus. Among others, these two mechanisms imply that better social relationships sometimes lead to higher bonuses, while worse social relationships may increase productivity and players' utility in equilibrium.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 12-054/1.

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Date of creation: 16 May 2012
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Handle: RePEc:dgr:uvatin:20120054

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Web page: http://www.tinbergen.nl

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Keywords: Altruism; spite; social relations; incentives; relational contracts; efficiency wages; subjective performance evaluation; Nash bargaining;

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References

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Cited by:
  1. Bassi, Matteo & Pagnozzi, Marco & Piccolo, Salvatore, 2014. "Optimal contracting with altruism and reciprocity," Research in Economics, Elsevier, vol. 68(1), pages 27-38.
  2. Kragl, Jenny & Gogova, Martina, 2013. "Wage Bargaining when Workers Have Fairness Concerns," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79790, Verein für Socialpolitik / German Economic Association.

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