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The Pygmalion and Galatea Effects: An Agency Model with Reference-Dependent Preferences and Applications to Self-Fulfilling Prophecy

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Author Info

  • Kohei Daido

    ()
    (School of Economics, Kwansei Gakuin University)

  • Hideshi Itoh

    (Graduate School of Commerce and Management, Hitotsubashi University)

Abstract

We attempt to formulate and explain two types of self-fulfilling prophecy, called the Pygmalion effect (if a supervisor thinks her subordinates will succeed, they are more likely to succeed) and the Galatea effect (if a person thinks he will succeed, he is more likely to succeed). To this purpose, we extend a simple agency model with moral hazard and limited liability by introducing a model of reference-dependent preferences (RDP) by K˝oszegi and Rabin (2004). We show that the agent with high expectations about his performance can be induced to choose high effort with low-powered incentives. We then argue that the principal’s expectation has an important role as an equilibrium selection device.

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File URL: http://192.218.163.163/RePEc/pdf/kgdp35.pdf
File Function: First version, 2007
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Bibliographic Info

Paper provided by School of Economics, Kwansei Gakuin University in its series Discussion Paper Series with number 35.

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Length: 37 pages
Date of creation: Sep 2007
Date of revision: Sep 2007
Handle: RePEc:kgu:wpaper:35

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Keywords: Self-fulfilling prophecy; Pygmalion effect; Galatea effect; referencedependent preferences; agency model; moral hazard;

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References

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  1. Falk, Armin & Knell, Markus, 2004. "Choosing the Joneses: Endogenous Goals and Reference Standards," IZA Discussion Papers 1152, Institute for the Study of Labor (IZA).
  2. Munro, Alistair & Sugden, Robert, 2003. "On the theory of reference-dependent preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 50(4), pages 407-428, April.
  3. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  4. Koszegi, Botond & Rabin, Matthew, 2004. "A Model of Reference-Dependent Preferences," Department of Economics, Working Paper Series qt0w82b6nm, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  5. Roland Bénabou & Jean Tirole, 2003. "Intrinsic and Extrinsic Motivation," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 489-520.
  6. Sugden, Robert, 2003. "Reference-dependent subjective expected utility," Journal of Economic Theory, Elsevier, vol. 111(2), pages 172-191, August.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. The Galatea Effect:The Power of Self-expectations
    by Miguel in Simoleon Sense on 2009-12-15 01:57:14
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Cited by:
  1. Fabian Herweg & Daniel Müller & Philipp Weinschenk, 2008. "The Optimality of Simple Contracts: Moral Hazard and Loss Aversion," Bonn Econ Discussion Papers bgse17_2008, University of Bonn, Germany.
  2. Kohei Daido & Kimiyuki Morita & Takeshi Murooka & Hiromasa Ogawa, 2013. "Task Assignment under Agent Loss Aversion," Discussion Paper Series 103, School of Economics, Kwansei Gakuin University, revised Mar 2013.
  3. Fabian Herweg & Daniel Müller & Philipp Weinschenk, 2010. "Binary Payment Schemes: Moral Hazard and Loss Aversion," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2010_38, Max Planck Institute for Research on Collective Goods.
  4. Joaquín Gómez Miñambres, 2011. "Make it challenging : motivation through goal setting," Economics Working Papers we1123, Universidad Carlos III, Departamento de Economía.
  5. Kohei Daido & Takeshi Murooka, 2013. "Loss Aversion, Stochastic Compensation, and Team Incentives," Discussion Paper Series 107, School of Economics, Kwansei Gakuin University, revised Jul 2013.

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