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Moral Hazard and Clear Conscience

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  • Miettinen, Topi

    ()
    (Stockholm Institute of Transition Economics)

Abstract

The paper studies theoretically how the optimal contract in the hidden-action moral hazard model is affected when an agent feels bad when not reaching a target effort set in the contract. While the presence of guilt brings the outcome closer to first-best, an effort target is not costless for the principal. In equilibrium, the agent’s effort falls short of the target, inducing guilt which must be compensated by a higher financial reward. Thus, although the principal’s payoff is higher, the agent receives a part of the monetary rents accruing to intrinsic motivation. This result differs markedly from previous contributions on contracting under social preference or pro-social motivation.

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Bibliographic Info

Paper provided by Stockholm Institute of Transition Economics, Stockholm School of Economics in its series SITE Working Paper Series with number 4.

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Length: 19 pages
Date of creation: 08 Sep 2009
Date of revision:
Handle: RePEc:hhs:hasite:0004

Contact details of provider:
Postal: Stockholm Institute of Transition Economics, Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden
Phone: (+46 8) 736 9670
Fax: (+46 8) 31 64 22
Web page: http://www.hhs.se/site/
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Related research

Keywords: Moral Hazard; Norms; Agency; Social Preferences; Guilt; Work Ethic;

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  1. Fehr, Ernst & Schmidt, Klaus M., . "A theory of fairness, competition, and cooperation," Chapters in Economics, University of Munich, Department of Economics, University of Munich, Department of Economics.
  2. George A. Akerlof & Rachel E. Kranton, 2005. "Identity and the Economics of Organizations," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 19(1), pages 9-32, Winter.
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  4. S. Huck & D. Kübler & J. Weibull, 2002. "Social norms and optimal incentives in firms," SFB 373 Discussion Papers, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes 2002,11, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  5. Margin Dufwenberg & Georg Kirchsteiger, 2001. "A Theory of Sequential Reciprocity," Levine's Working Paper Archive 563824000000000090, David K. Levine.
  6. Bengt Holmstrom & Paul R. Milgrom, 1985. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 742, Cowles Foundation for Research in Economics, Yale University.
  7. Topi Miettinen, 2006. "Promises and Conventions - An Approach to Pre-play Agreements," Papers on Strategic Interaction, Max Planck Institute of Economics, Strategic Interaction Group 2006-29, Max Planck Institute of Economics, Strategic Interaction Group.
  8. Axel Ockenfels & Gary E. Bolton, 2000. "ERC: A Theory of Equity, Reciprocity, and Competition," American Economic Review, American Economic Association, American Economic Association, vol. 90(1), pages 166-193, March.
  9. Gary Charness & Martin Dufwenberg, 2004. "Promises and Partnership," Levine's Bibliography 122247000000000001, UCLA Department of Economics.
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  11. Dufwenberg, Martin & Gneezy, Uri, 2000. "Measuring Beliefs in an Experimental Lost Wallet Game," Games and Economic Behavior, Elsevier, Elsevier, vol. 30(2), pages 163-182, February.
  12. Hideshi Itoh, 2004. "Moral Hazard and Other-Regarding Preferences," The Japanese Economic Review, Japanese Economic Association, Japanese Economic Association, vol. 55(1), pages 18-45.
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