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Task Assignment under Agent Loss Aversion

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  • Kohei Daido

    ()
    (School of Economics, Kwansei Gakuin University)

  • Kimiyuki Morita

    ()
    (Graduate School of Commerce and Management, Hitotsubashi University)

  • Takeshi Murooka

    ()
    (Department of Economics, University of California-Berkeley)

  • Hiromasa Ogawa

    ()
    (Graduate School of Economics, University of Tokyo)

Abstract

We analyze a simple task-assignment model in which a principal assigns a task to one of two agents depending on the state. If the agents have standard concave utility, the principal assigns the task to an agent with the highest productivity in each state. In contrast, if the agents are loss averse, in order to alleviate their expected losses the principal may assign the task to a single agent in all states. Furthermore, the optimal contract may specify the same effort level across states. Our results imply that such simple contracts can be optimal even when employers can write contingent contracts at no cost.

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File URL: http://192.218.163.163/RePEc/pdf/kgdp103.pdf
File Function: First version, 2013
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Bibliographic Info

Paper provided by School of Economics, Kwansei Gakuin University in its series Discussion Paper Series with number 103.

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Length: 15 pages
Date of creation: Mar 2013
Date of revision: Mar 2013
Handle: RePEc:kgu:wpaper:103

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Keywords: task assignment; loss aversion; reference-dependent preferences;

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References

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  1. Fabian Herweg & Daniel Muller & Philipp Weinschenk, 2010. "Binary Payment Schemes: Moral Hazard and Loss Aversion," American Economic Review, American Economic Association, vol. 100(5), pages 2451-77, December.
  2. Herweg, Fabian, 2010. "Uncertain Demand, Consumer Loss Aversion, and Flat-Rate Tariffs," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 330, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  3. Oliver Hart & John Moore, 2008. "Contracts as Reference Points," The Quarterly Journal of Economics, MIT Press, vol. 123(1), pages 1-48, 02.
  4. Heidhues, Paul & Köszegi, Botond, 2005. "The Impact of Consumer Loss Aversion on Pricing," CEPR Discussion Papers 4849, C.E.P.R. Discussion Papers.
  5. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  6. Herweg, Fabian & Schmidt, Klaus, 2013. "Loss Aversion and Ex Post Inefficient Renegotiation," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79772, Verein für Socialpolitik / German Economic Association.
  7. Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, MIT Press, vol. 121(4), pages 1133-1165, November.
  8. Ernst Fehr & Oliver Hart & Christian Zehnder, 2008. "Contracts as reference points – experimental evidence," IEW - Working Papers 393, Institute for Empirical Research in Economics - University of Zurich.
  9. David Gill & Rebecca Stone, 2006. "Fairness and Desert in Tournaments," Economics Series Working Papers 279, University of Oxford, Department of Economics.
  10. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
  11. Mukerji, Sujoy, 1998. "Ambiguity Aversion and Incompleteness of Contractual Form," American Economic Review, American Economic Association, vol. 88(5), pages 1207-31, December.
  12. Kohei Daido & Takeshi Murooka, 2011. "Team Incentives and Reference-Dependent Preferences," Discussion Paper Series 70, School of Economics, Kwansei Gakuin University, revised May 2011.
  13. Jean Tirole, 2009. "Cognition and Incomplete Contracts," American Economic Review, American Economic Association, vol. 99(1), pages 265-94, March.
  14. Herweg, Fabian & Mierendorff, Konrad, 2013. "Uncertain Demand, Consumer Loss Aversion, and Flat-Rate Tariffs," Munich Reprints in Economics 19420, University of Munich, Department of Economics.
  15. Botond Koszegi & Matthew Rabin, 2007. "Reference-Dependent Risk Attitudes," American Economic Review, American Economic Association, vol. 97(4), pages 1047-1073, September.
  16. Herweg, Fabian & Müller, Daniel & Weinschenk, Philipp, 2010. "Binary payment schemes: Moral hazard and loss aversion," Munich Reprints in Economics 19450, University of Munich, Department of Economics.
  17. Botond Kőszegi & Paul Heidhues, 2008. "Competition and Price Variation When Consumers Are Loss Averse," American Economic Review, American Economic Association, vol. 98(4), pages 1245-68, September.
  18. Kohei Daido & Hideshi Itoh, 2007. "The Pygmalion and Galatea Effects: An Agency Model with Reference-Dependent Preferences and Applications to Self-Fulfilling Prophecy," Discussion Paper Series 35, School of Economics, Kwansei Gakuin University, revised Sep 2007.
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