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Agency and Anxiety

  • Michael T. Rauh
  • Giulio Seccia

"In this paper, we introduce the psychological concept of anxiety into agency theory. An important benchmark in the anxiety literature is the inverted-U hypothesis, which states that an increase in anxiety improves performance when anxiety is low, but reduces it when anxiety is high. We show that the inverted-U hypothesis is consistent with evidence that high-powered incentives can reduce the agent's optimal effort and expected performance. In equilibrium, however, a profit-maximizing principal never offers such counterproductive incentives. We also show that the inverted-U hypothesis can explain empirical anomalies related to monitoring, the informativeness principle, and the risk-reward tradeoff." Copyright (c) 2010, The Author(s) Journal Compilation (c) 2010 Wiley Periodicals, Inc..

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Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 19 (2010)
Issue (Month): 1 (03)
Pages: 87-116

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Handle: RePEc:bla:jemstr:v:19:y:2010:i:1:p:87-116
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  1. Michael T. Rauh & Giulio Seccia, 2005. "Anxiety and Performance: An Endogenous Learning-by-doing Model," Working Papers 2005-01, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  2. Baker, G.P. & Jensen, M.C. & Murphy, K.J., 1988. "Compensation And Incentives: Practice Vs. Theory," Papers 88-05, Rochester, Business - Managerial Economics Research Center.
  3. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
  4. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, vol. 58(6), pages 1255-77, November.
  5. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
  6. repec:tpr:qjecon:v:115:y:2000:i:3:p:791-810 is not listed on IDEAS
  7. Barkema, Harry G, 1995. "Do Top Managers Work Harder When They Are Monitored?," Kyklos, Wiley Blackwell, vol. 48(1), pages 19-42.
  8. Dan Ariely & Uri Gneezy & George Loewenstein & Nina Mazar, 2009. "Large Stakes and Big Mistakes," Review of Economic Studies, Oxford University Press, vol. 76(2), pages 451-469.
  9. Edward P. Lazear, 1996. "Performance Pay and Productivity," NBER Working Papers 5672, National Bureau of Economic Research, Inc.
  10. Loewenstein, George, 1987. "Anticipation and the Valuation of Delayed Consumption," Economic Journal, Royal Economic Society, vol. 97(387), pages 666-84, September.
  11. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March.
  12. Vives, X., 1988. "Nash Equilibrium With Strategic Complementarities," UFAE and IAE Working Papers 107-88, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  13. Frey, Bruno S & Jegen, Reto, 2001. " Motivation Crowding Theory," Journal of Economic Surveys, Wiley Blackwell, vol. 15(5), pages 589-611, December.
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