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How Ego-threats Facilitate Contracts Based on Subjective Evaluations

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Author Info

  • Alexander Sebald

    (Department of Economics, University of Copenhagen)

  • Markus Walzl

    (Department of Economics, University of Maastricht)

Abstract

We show that individuals’ desire to protect their self-esteem against ego-threatening feedback can mitigate moral hazard in environments with purely subjective performance evaluations. In line with evidence from social psychology we assume that agents’ react aggressively to evaluations by the principal which do not coincide with their own positive self-perceptions and thereby generate costs of conflict for the principal. We identify conditions for a positive welfare effect of increasing costs of conflict or increasing sensitivity to ego-threats, 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 University of Copenhagen. Department of Economics in its series Discussion Papers with number 08-19.

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Length: 25 pages
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:kud:kuiedp:0819

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Keywords: contracts; Subjective evaluations; self-esteem; ego-threats;

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  1. Jonathan Levin, 2000. "Relational Incentive Contracts," Working Papers, Stanford University, Department of Economics 01002, Stanford University, Department of Economics.
  2. Falk, Armin & Fischbacher, Urs, 2006. "A theory of reciprocity," Games and Economic Behavior, Elsevier, Elsevier, vol. 54(2), pages 293-315, February.
  3. Tore Ellingsen & Magnus Johannesson, 2008. "Pride and Prejudice: The Human Side of Incentive Theory," American Economic Review, American Economic Association, American Economic Association, vol. 98(3), pages 990-1008, June.
  4. Georg Kirchsteiger & Martin Dufwenberg, 2004. "A theory of sequential reciprocity," ULB Institutional Repository 2013/5899, ULB -- Universite Libre de Bruxelles.
  5. Matthew Rabin., 1992. "Incorporating Fairness into Game Theory and Economics," Economics Working Papers, University of California at Berkeley 92-199, University of California at Berkeley.
  6. Malcomson, James M, 1984. "Work Incentives, Hierarchy, and Internal Labor Markets," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 92(3), pages 486-507, June.
  7. Bentley W. MacLeod, 2003. "Optimal Contracting with Subjective Evaluation," American Economic Review, American Economic Association, American Economic Association, vol. 93(1), pages 216-240, March.
  8. Botond Köszegi, 2006. "Ego Utility, Overconfidence, and Task Choice," Journal of the European Economic Association, MIT Press, MIT Press, vol. 4(4), pages 673-707, 06.
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