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Moral Hazard and Clear Conscience

  • Topi Miettinen

The paper studies theoretically how the optimal contract in the hidden-action moral-hazard model is affected when an agent feels bad when not reaching a target effort set in the contract. In equilibrium, the agent's effort falls short of the target, inducing guilt, which must be compensated by a higher financial reward. Thus, although the principal's payoff is higher, the agent receives a part of the monetary rents accruing to intrinsic motivation. This result differs markedly from previous contributions on contracting under social preference or pro-social motivation.

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Article provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.

Volume (Year): 167 (2011)
Issue (Month): 2 (June)
Pages: 224-235

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Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201106)167:2_224:mhacc_2.0.tx_2-c
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