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Are you a good employee or simply a good guy? Influence Costs and Contract Design

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  • Brice Corgnet

    ()
    (Facultad de Ciencias Económicas y Empresariales, Universidad de Navarra)

  • Ismael Rodriguez Lara

    ()
    (Departamento de Fundamentos del Análisis Económico, Universidad de Alicante)

Abstract

We develop a principal-agent model in which the principal has access to hard and soft information about the agent’s level of effort. We model the soft signal as being informative about the agent’s level of effort but manipulable by the agent at a cost. We show that the presence of influence activities increases the cost of implementing the efficient level of effort for the principal. We also show that the manipulability of the soft signal leads to wage compression. However, when influence costs affect negatively the agent’s productivity we establish that the design of influence-free contracts by the principal may lead to high-powered incentives. This result implies that high-productivity workers may face incentives schemes that are more responsive and give more weight to hard evidence compared to low-productivity workers.

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Bibliographic Info

Paper provided by School of Economics and Business Administration, University of Navarra in its series Faculty Working Papers with number 13/09.

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Length: 38 pages
Date of creation: 02 Nov 2009
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Handle: RePEc:una:unccee:wp1309

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Web page: http://www.unav.es/facultad/econom

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  1. Baliga, Sandeep, 1999. "Monitoring and Collusion with "Soft" Information," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(2), pages 434-40, July.
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  12. Gibbons, Robert, 2005. "Four forma(lizable) theories of the firm?," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 200-245, October.
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  14. Baker, George & Gibbons, Robert & Murphy, Kevin J, 1994. "Subjective Performance Measures in Optimal Incentive Contracts," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 1125-56, November.
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  17. Bentley MacLeod, 2001. "Optimal Contracting with Subjective Evaluation," Theory workshop papers 357966000000000036, UCLA Department of Economics.
  18. Steven Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 55-73, Spring.
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  1. Corgnet, Brice & Rodriguez-Lara, Ismael, 2013. "Are you a good employee or simply a good guy? Influence costs and contract design," Journal of Economic Behavior & Organization, Elsevier, vol. 92(C), pages 259-272.

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