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Social Relations and Relational Incentives

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  • Robert Dur
  • Jan Tichem

Abstract

This paper studies how social relationships between managers and employees affect relational incentive contracts. To this end we develop a simple dynamic principal-agent model where both players may have feelings of altruism or spite toward each other. The contract may contain two types of incentives for the agent to work hard: a bonus and a threat of dismissal. We find that good social relationships undermine the credibility of a threat of dismissal but strengthen the credibility of a bonus. Among others, these two mechanisms imply that better social relationships sometimes lead to higher bonuses, while worse social relationships may increase productivity and players’ utility in equilibrium.

Suggested Citation

  • Robert Dur & Jan Tichem, 2012. "Social Relations and Relational Incentives," CESifo Working Paper Series 3826, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_3826
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    References listed on IDEAS

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    More about this item

    Keywords

    altruism; spite; social relations; incentives; relational contracts; efficiency wages; subjective performance evaluation; Nash bargaining;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • M55 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Contracting Devices

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