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Positive self-image and incentives in organizations

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Author Info
Santos-Pinto, Luís

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Abstract

This paper investigates the implications of individuals’ mistaken beliefs of their abilities on incentives in organizations using the principal-agent model of moral hazard. The paper shows that if effort is observable, then an agent’s mistaken beliefs about own ability are always favorable to the principal. However, if effort is unobservable, then an agent’s mistaken beliefs about own ability can be either favorable or unfavorable to the principal. The paper provides conditions under which an agent’s over estimation about own ability is favorable to the principal when effort is unobservable. Finally, the paper shows that workers’ mistaken beliefs about their coworkers’ abilities make interdependent incentive schemes more attractive to firms than individualistic incentive schemes.

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File URL: http://mpra.ub.uni-muenchen.de/3141/
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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3141.

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Date of creation: 03 Sep 2003
Date of revision: 14 Feb 2007
Handle: RePEc:pra:mprapa:3141

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Related research
Keywords: Positive Self-Image Incentives Moral Hazard Behavioral Economics.

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Find related papers by JEL classification:
J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March. [Downloadable!] (restricted)
  2. Hanming Fang & Giuseppe Moscarini, 2004. "Morale Hazard," Yale School of Management Working Papers ysm386, Yale School of Management. [Downloadable!]
    Other versions:
  3. Leonidas Enrique de la Rosa, 2007. "Overconfidence and Moral Hazard," Economics Working Papers 2007-08, School of Economics and Management, University of Aarhus. [Downloadable!]
  4. Baker, George P & Jensen, Michael C & Murphy, Kevin J, 1988. " Compensation and Incentives: Practice vs. Theory," Journal of Finance, American Finance Association, vol. 43(3), pages 593-616, July. [Downloadable!] (restricted)
    Other versions:
  5. Roland Benabou & Jean Tirole, 2003. "Intrinsic and Extrinsic Motivation," Review of Economic Studies, Blackwell Publishing, vol. 70(3), pages 489-520, 07. [Downloadable!] (restricted)
  6. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January. [Downloadable!] (restricted)
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  7. Hvide, Hans K., 2002. "Pragmatic beliefs and overconfidence," Journal of Economic Behavior & Organization, Elsevier, vol. 48(1), pages 15-28, May. [Downloadable!] (restricted)
  8. Brozynski, Torsten & Menkhoff, Lukas & Schmidt, Ulrich, 2004. "The Impact of Experience on Risk Taking, Overconfidence, and Herding of Fund Managers: Complementary Survey Evidence," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-292, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
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  9. Mookherjee, Dilip, 1984. "Optimal Incentive Schemes with Many Agents," Review of Economic Studies, Blackwell Publishing, vol. 51(3), pages 433-46, July. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sandra Ludwig & Julia Nafziger, . "Do You Know That I Am Biased? An Experiment," Bonn Econ Discussion Papers bgse11_2007, University of Bonn, Germany. [Downloadable!]
  2. Leonidas Enrique De La Rosa, 2008. "Overconfidence in a Career-Concerns Setting," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  3. Donald Cox & Beth J. Soldo, 2004. "Motivation for Money and Care that Adult Children Provide for Parents: Evidence from "Point-Blank" Survey Questions," Working Papers, Center for Retirement Research at Boston College 2004-17, Center for Retirement Research. [Downloadable!]
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