Strategic Framing in Contracts
AbstractWe provide a hidden-action principal-agent model where the agent has reference- dependent preferences. The loss-averse agent considers the base wage as reference point, and bonuses and/or penalties as gains and losses, respectively. When choosing optimal payments, the principal strategically sets the base wage, knowing that this determines the agent's reference point. We consider two variants of the model. In a first variant, the agent's reservation utility is not reference-dependent. We show that it is always optimal in this case for the principal to employ bonuses. In a second variant, the reservation utility is reference-dependent and the principal may use penalties.
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Bibliographic InfoPaper provided by Utrecht School of Economics in its series Working Papers with number 13-04.
Length: 26 pages
Date of creation: Mar 2013
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Find related papers by JEL classification:
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
- M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-04-13 (All new papers)
- NEP-CTA-2013-04-13 (Contract Theory & Applications)
- NEP-HRM-2013-04-13 (Human Capital & Human Resource Management)
- NEP-MIC-2013-04-13 (Microeconomics)
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