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Optimal contracts based on subjective evaluations and reciprocity

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  • Alexander Sebald

    ()

  • Markus Walzl

    ()

Abstract

As we have demonstrated in a recent laboratory experiment [see Sebald and Walzl (2012)], individuals tend to sanction others who subjectively evaluate their performance whenever this assessment falls short of the individual's self-evaluation even if their earnings are unaffected by the assessment. Hence, performance assessments which fall short of the agents' self-evaluation can be interpreted as an unkind act that triggers a negatively reciprocal response not only if the assessment determines an agent's earnings but also if it lacks monetary consequences. We propose a principal-agent model that accommodates this kind of payoff independent reciprocity and identify conditions for a positive welfare effect of increasing costs of conflict or increasing psychological sensitivity, and a negative welfare effect of a more informative information technology. As a consequence, principals may choose imperfect information technologies in equilibrium even if the signal quality is costless.

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Bibliographic Info

Paper provided by Faculty of Economics and Statistics, University of Innsbruck in its series Working Papers with number 2012-16.

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Length: 41
Date of creation: Aug 2012
Date of revision:
Handle: RePEc:inn:wpaper:2012-16

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Related research

Keywords: Contracts; Subjective Evaluations; Self-Esteem; Ego-Threats; Reciprocity;

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References

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  1. Falk, Armin & Fischbacher, Urs, 2001. "A Theory of Reciprocity," CEPR Discussion Papers 3014, C.E.P.R. Discussion Papers.
  2. Prendergast, Canice & Topel, Robert H, 1996. "Favoritism in Organizations," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 958-78, October.
  3. Bentley MacLeod, 2001. "Optimal Contracting with Subjective Evaluation," Theory workshop papers 357966000000000036, UCLA Department of Economics.
  4. Jonathan Levin, 2003. "Relational Incentive Contracts," American Economic Review, American Economic Association, vol. 93(3), pages 835-857, June.
  5. Ellingsen, Tore & Johannesson, Magnus, 2006. "Pride and Prejudice: The Human Side of Incentive Theory," CEPR Discussion Papers 5768, C.E.P.R. Discussion Papers.
  6. Malcomson, James M, 1984. "Work Incentives, Hierarchy, and Internal Labor Markets," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 486-507, June.
  7. Georg Kirchsteiger & Martin Dufwenberg, 2004. "A theory of sequential reciprocity," ULB Institutional Repository 2013/5899, ULB -- Universite Libre de Bruxelles.
  8. Rabin, Matthew, 1993. "Incorporating Fairness into Game Theory and Economics," American Economic Review, American Economic Association, vol. 83(5), pages 1281-1302, December.
  9. Alexander Sebald & Markus Walzl, 2012. "Subjective performance evaluations and reciprocity in principal-agent relations," Working Papers 2012-15, Faculty of Economics and Statistics, University of Innsbruck.
  10. Sebald, Alexander, 2007. "Procedural Concerns," MPRA Paper 4508, University Library of Munich, Germany.
  11. Botond Köszegi, 2006. "Ego Utility, Overconfidence, and Task Choice," Journal of the European Economic Association, MIT Press, vol. 4(4), pages 673-707, 06.
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