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.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Universidade Nova de Lisboa, Faculdade de Economia in its series FEUNL Working Paper Series with number
wp509.
For technical questions regarding this item, or to correct its listing, contact: (Lourdes Gouveia).
Related research
Keywords:
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.)