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Relative performance or team evaluation? Optimal contracts for other-regarding agents

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  • Bartling, Björn

Abstract

This paper derives optimal incentive contracts for agents with other-regarding preferences. It offers a behavioral explanation for the empirically observed lack of relative performance evaluation. We analyze a principal-multi agent model and assume that agents are inequity averse or status seeking. We show that team contracts can be optimal even if the agents' performance measures are positively correlated such that relative performance evaluation would be optimal with purely self-interested agents and even though relative performance evaluation provides additional incentives to provide effort if agents have other-regarding preferences. Furthermore, optimal incentive contracts for other-regarding agents can be low-powered as compared to contracts for purely self-interested agents.

Suggested Citation

  • Bartling, Björn, 2011. "Relative performance or team evaluation? Optimal contracts for other-regarding agents," Journal of Economic Behavior & Organization, Elsevier, vol. 79(3), pages 183-193, August.
  • Handle: RePEc:eee:jeborg:v:79:y:2011:i:3:p:183-193
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    Cited by:

    1. Pradeep Dubey & John Geanakoplos & Ori Haimanko, 2013. "Prizes Versus Wages With Envy And Pride," The Japanese Economic Review, Japanese Economic Association, vol. 64(1), pages 98-121, March.
    2. Robert Dur & Jan Tichem, 2012. "Social Relations and Relational Incentives," Tinbergen Institute Discussion Papers 12-054/1, Tinbergen Institute.
    3. Imhof, Lorens & Kräkel, Matthias, 2014. "Bonus pools and the informativeness principle," European Economic Review, Elsevier, vol. 66(C), pages 180-191.
    4. Bartling, Björn & von Siemens, Ferdinand A., 2010. "The intensity of incentives in firms and markets: Moral hazard with envious agents," Labour Economics, Elsevier, vol. 17(3), pages 598-607, June.
    5. Bierbrauer, Felix & Netzer, Nick, 2016. "Mechanism design and intentions," Journal of Economic Theory, Elsevier, vol. 163(C), pages 557-603.
    6. Matthias Fahn & Hendrik Hakenes, 2014. "Teamwork as a Self-Disciplining Device," CESifo Working Paper Series 5131, CESifo Group Munich.
    7. repec:eee:eecrev:v:101:y:2018:i:c:p:230-249 is not listed on IDEAS
    8. Huck, Steffen & Kübler, Dorothea & Weibull, Jörgen, 2012. "Social norms and economic incentives in firms," Journal of Economic Behavior & Organization, Elsevier, vol. 83(2), pages 173-185.
    9. Gill, David & Stone, Rebecca, 2015. "Desert and inequity aversion in teams," Journal of Public Economics, Elsevier, vol. 123(C), pages 42-54.
    10. Inés Macho-Stadler & David Pérez-Castrillo, 2016. "Moral Hazard: Base Models and Two Extensions," Working Papers 883, Barcelona Graduate School of Economics.
    11. Luca Livio, 2018. "Friends or Foes? Optimal Incentives for Reciprocal Agents," Working Papers ECARES 2018-03, ULB -- Universite Libre de Bruxelles.
    12. repec:bla:jemstr:v:25:y:2016:i:4:p:958-989 is not listed on IDEAS
    13. Golman, Russell & Bhatia, Sudeep, 2012. "Performance evaluation inflation and compression," Accounting, Organizations and Society, Elsevier, vol. 37(8), pages 534-543.
    14. Kirill Chernomaz, 2012. "Inequity aversion in a model with moral hazard," Economics Bulletin, AccessEcon, vol. 32(3), pages 2500-2510.
    15. Kohei Daido & Takeshi Murooka, 2016. "Team Incentives and Reference-Dependent Preferences," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 25(4), pages 958-989, December.
    16. Gürtler, Marc & Gürtler, Oliver, 2012. "Inequality aversion and externalities," Journal of Economic Behavior & Organization, Elsevier, vol. 84(1), pages 111-117.
    17. Delfgaauw, Josse & Dur, Robert & Non, Arjan & Verbeke, Willem, 2014. "Dynamic incentive effects of relative performance pay: A field experiment," Labour Economics, Elsevier, vol. 28(C), pages 1-13.
    18. Matthias Fahn & Hendrik Hakenes, 2014. "Teamwork as a Self-Disciplining Device," CESifo Working Paper Series 5131, CESifo Group Munich.
    19. Bartling, Björn, 2012. "Multi-tasking and inequity aversion in the linear–exponential–normal moral hazard model," Economics Letters, Elsevier, vol. 116(3), pages 523-525.
    20. Shingo Ishiguro, 2011. "Fair Contracts," Discussion Papers in Economics and Business 11-30, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    21. Yingchao Zhang & Oliver Fabel & Christian Thomann, 2015. "Pay inequity effects on back-office employees’ job performances: the case of a large insurance firm," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 23(2), pages 421-439, June.
    22. Michael Krapp & Kai Sandner, 2016. "Impact of an equal pay norm on the optimal design of incentive contracts," Journal of Business Economics, Springer, vol. 86(3), pages 301-338, April.
    23. Biener, Christian & Eling, Martin & Landmann, Andreas & Pradhan, Shailee, 2018. "Can group incentives alleviate moral hazard? The role of pro-social preferences," European Economic Review, Elsevier, vol. 101(C), pages 230-249.
    24. Kragl, Jenny & Gogova, Martina, 2013. "Wage Bargaining when Workers Have Fairness Concerns," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79790, Verein für Socialpolitik / German Economic Association.

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