Moral Hazard and Clear Conscience
AbstractThe 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 InfoPaper provided by Stockholm Institute of Transition Economics, Stockholm School of Economics in its series SITE Working Paper Series with number 4.
Length: 19 pages
Date of creation: 08 Sep 2009
Date of revision:
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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
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More information through EDIRC
Moral Hazard; Norms; Agency; Social Preferences; Guilt; Work Ethic;
Other versions of this item:
- Topi Miettinen, 2011. "Moral Hazard and Clear Conscience," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 167(2), pages 224-235, June.
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Social and Economic Stratification
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