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Contract design with socially attentive preferences

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  • Koch, Simon
  • Weinschenk, Philipp

Abstract

The standard agency model assumes that the agent does not care how his decisions influence others. This is a strong assumption, which we relax. We find that, although monetary incentives are also effective with socially attentive agents, the principal may optimally set none. This could explain the puzzle why empirically only a fraction of employees experiences monetary incentives. Furthermore, in case the agent's type is private information, the principal optimally offers a single pooling contract, i.e., never screens for different types, no matter how rich the set of possible attentiveness levels is and what shape the underlying distribution function has.

Suggested Citation

  • Koch, Simon & Weinschenk, Philipp, 2021. "Contract design with socially attentive preferences," Games and Economic Behavior, Elsevier, vol. 130(C), pages 591-601.
    • Handle: RePEc:eee:gamebe:v:130:y:2021:i:c:p:591-601
    DOI: 10.1016/j.geb.2021.10.002
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    More about this item

    Keywords

    Agency model; Socially attentive preferences; Incentives;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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