IDEAS home Printed from https://ideas.repec.org/p/met/wpaper/1802.html
   My bibliography  Save this paper

Other-Regarding Preferences in Organizational Hierarchies

Author

Listed:
  • Kemal Saygili

    (Department of Economics, Middle East Technical University, Ankara, Turkey)

  • Serkan Kucuksenel

    (Department of Economics, Middle East Technical University, Ankara, Turkey)

Abstract

In this paper, we provide new theoretical insights about the role of collusion in organizational hierarchies by combining the standard principal-supervisor-agent framework with a theory of social preferences. Extending Tirole’s (1986) model of hierarchy with the inclusion of Fehr and Schmidt’s (1999) distributional other-regarding preferences approach, the links between inequity aversion, collusive behavior throughout the levels of a hierarchy and the changes in optimal contracts are studied. It turns out that other-regarding preferences do change the collusive behavior among parties depending on the nature of both the agent’s and the supervisor’s other-regarding preferences. Most prominent impact is on the optimal effort levels. When the agent is inequity averse principal can exploit this fact to make agent exert higher effort level than she would otherwise. In order to satisfy the participation constraint of the supervisor, the effort level induced for the agent becomes lower when the supervisor is status seeker, and it is higher when the supervisor is inequity averse.

Suggested Citation

  • Kemal Saygili & Serkan Kucuksenel, 2018. "Other-Regarding Preferences in Organizational Hierarchies," ERC Working Papers 1802, ERC - Economic Research Center, Middle East Technical University, revised Feb 2018.
    • Handle: RePEc:met:wpaper:1802
    as

    Download full text from publisher

    File URL: http://erc.metu.edu.tr/en/system/files/menu/series18/1802.pdf
    File Function: First version, 2018
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Pedro Rey‐Biel, 2008. "Inequity Aversion and Team Incentives," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(2), pages 297-320, June.
    2. Hideshi Itoh, 2004. "Moral Hazard and Other‐Regarding Preferences," The Japanese Economic Review, Japanese Economic Association, vol. 55(1), pages 18-45, March.
    3. Ernst Fehr & Klaus M. Schmidt, 1999. "A Theory of Fairness, Competition, and Cooperation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(3), pages 817-868.
    4. Kragl, Jenny & Schmid, Julia, 2009. "The impact of envy on relational employment contracts," Journal of Economic Behavior & Organization, Elsevier, vol. 72(2), pages 766-779, November.
    5. Bartling, Björn & von Siemens, Ferdinand A., 2010. "The intensity of incentives in firms and markets: Moral hazard with envious agents," Labour Economics, Elsevier, vol. 17(3), pages 598-607, June.
    6. William S. Neilson & Jill Stowe, 2010. "Piece‐Rate Contracts For Other‐Regarding Workers," Economic Inquiry, Western Economic Association International, vol. 48(3), pages 575-586, July.
    7. Alan S. Blinder & Don H. Choi, 1990. "A Shred of Evidence on Theories of Wage Stickiness," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(4), pages 1003-1015.
    8. Christian Grund & Dirk Sliwka, 2005. "Envy and Compassion in Tournaments," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(1), pages 187-207, March.
    9. Carl M. Campbell III & Kunal S. Kamlani, 1997. "The Reasons for Wage Rigidity: Evidence from a Survey of Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(3), pages 759-789.
    10. Fehr, Ernst & Schmidt, Klaus M., 2006. "The Economics of Fairness, Reciprocity and Altruism - Experimental Evidence and New Theories," Handbook on the Economics of Giving, Reciprocity and Altruism, in: S. Kolm & Jean Mercier Ythier (ed.), Handbook of the Economics of Giving, Altruism and Reciprocity, edition 1, volume 1, chapter 8, pages 615-691, Elsevier.
    11. Jack A. Nickerson & Todd R. Zenger, 2008. "Envy, comparison costs, and the economic theory of the firm," Strategic Management Journal, Wiley Blackwell, vol. 29(13), pages 1429-1449, December.
    12. Pepper, Alexander & Gore, Julie, 2015. "Behavioral agency theory: new foundations for theorizing about executive compensation," LSE Research Online Documents on Economics 47569, London School of Economics and Political Science, LSE Library.
    13. Amihai Glazer, 2008. "Optimal Contracts When a Worker Envies His Boss," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 24(1), pages 120-137, May.
    14. Mehmet Bac & Serkan Kucuksenel, 2006. "Two Types of Collusion in a Model of Hierarchical Agency," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(2), pages 262-276, June.
    15. Botond Köszegi, 2014. "Behavioral Contract Theory," Journal of Economic Literature, American Economic Association, vol. 52(4), pages 1075-1118, December.
    16. Tirole, Jean, 1986. "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 2(2), pages 181-214, Fall.
    17. Agell, Jonas & Lundborg, Per, 1995. " Theories of Pay and Unemployment: Survey Evidence from Swedish Manufacturing Firms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(2), pages 295-307, June.
    18. Claudine Gartenberg & Julie Wulf, 2017. "Pay Harmony? Social Comparison and Performance Compensation in Multibusiness Firms," Organization Science, INFORMS, vol. 28(1), pages 39-55, February.
    19. Bac, Mehmet, 1996. "Corruption, Supervision, and the Structure of Hierarchies," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 12(2), pages 277-298, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Stefano Dughera & Alain Marciano, 2022. "Supervise me if you can. Relational feelings, incentive pays and supervisory violations," Journal of Economics, Springer, vol. 136(1), pages 47-72, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Felix Kölle & Dirk Sliwka & Nannan Zhou, 2016. "Heterogeneity, inequity aversion, and group performance," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 46(2), pages 263-286, February.
    2. Bartling, Björn & von Siemens, Ferdinand A., 2010. "The intensity of incentives in firms and markets: Moral hazard with envious agents," Labour Economics, Elsevier, vol. 17(3), pages 598-607, June.
    3. Bental, Benjamin & Kragl, Jenny, 2021. "Inequality and incentives with societal other-regarding preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 188(C), pages 1298-1324.
    4. Kragl, Jenny & Gogova, Martina, 2013. "Wage Bargaining when Workers Have Fairness Concerns," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79790, Verein für Socialpolitik / German Economic Association.
    5. Bartling, Björn, 2011. "Relative performance or team evaluation? Optimal contracts for other-regarding agents," Journal of Economic Behavior & Organization, Elsevier, vol. 79(3), pages 183-193, August.
    6. Yingchao Zhang & Oliver Fabel & Christian Thomann, 2015. "Pay inequity effects on back-office employees’ job performances: the case of a large insurance firm," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 23(2), pages 421-439, June.
    7. Gürtler, Marc & Gürtler, Oliver, 2012. "Inequality aversion and externalities," Journal of Economic Behavior & Organization, Elsevier, vol. 84(1), pages 111-117.
    8. Michael Krapp & Kai Sandner, 2016. "Impact of an equal pay norm on the optimal design of incentive contracts," Journal of Business Economics, Springer, vol. 86(3), pages 301-338, April.
    9. Distefano, Rosaria, 2022. "Better to be in the same boat: Positional envy in the workplace," MPRA Paper 115396, University Library of Munich, Germany.
    10. Robert Dur & Amihai Glazer, 2004. "Optimal Incentive Contracts when Workers envy their Boss," Tinbergen Institute Discussion Papers 04-046/1, Tinbergen Institute, revised 13 Jun 2006.
    11. Pradeep Dubey & John Geanakoplos & Ori Haimanko, 2013. "Prizes Versus Wages With Envy And Pride," The Japanese Economic Review, Japanese Economic Association, vol. 64(1), pages 98-121, March.
    12. Robert Dur & Jan Tichem, 2012. "Social Relations and Relational Incentives," Tinbergen Institute Discussion Papers 12-054/1, Tinbergen Institute.
    13. Choi, Kangsik, 2016. "A Note On Envy And Earnings Inequality Under Limited Liability Contracts," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 57(1), pages 91-109, June.
    14. Bartling, Björn & von Siemens, Ferdinand A., 2011. "Wage inequality and team production: An experimental analysis," Journal of Economic Psychology, Elsevier, vol. 32(1), pages 1-16, February.
    15. Markus Brunner & Kai Sandner, 2012. "Social comparison, group composition, and incentive provision," International Journal of Game Theory, Springer;Game Theory Society, vol. 41(3), pages 565-602, August.
    16. Koji Abe & Hajime Kobayashi & Hideo Suehiro, 2014. "Leadership in the Prisoner's Dilemma with Inequity-Averse Preferences," Discussion Papers 2014-09, Kobe University, Graduate School of Business Administration.
    17. Küpper, Hans-Ulrich & Sandner, Kai, 2008. "Differences in Social Preferences - Are They Profitable for the Firm?," Discussion Papers in Business Administration 2122, University of Munich, Munich School of Management.
    18. Kragl, Jenny & Bental, Benjamin, 2020. "Other-Regarding Preferences and Incentives in the Societal Context," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224547, Verein für Socialpolitik / German Economic Association.
    19. Barigozzi, Francesca & Manna, Ester, 2020. "Envy in mission-oriented organisations," Journal of Economic Behavior & Organization, Elsevier, vol. 179(C), pages 395-424.
    20. Antonio Cabrales, 2010. "The causes and economic consequences of envy," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 1(4), pages 371-386, September.

    More about this item

    Keywords

    Other-Regarding Preferences; Hierarchy; Collusive Behavior; Optimal Contract Design;
    All these keywords.

    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:met:wpaper:1802. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Erol Taymaz (email available below). General contact details of provider: https://edirc.repec.org/data/ermettr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.