We interpret workers' confidence in their own skills as their morale, and investigate the implication of worker overconfidence on the firm's optimal wage-setting policies. In our model, wage contracts both provide incentives and affect worker morale, by revealing private information of the firm about worker skills. We provide conditions for the non-differentiation wage policy to be profit-maximizing. In numerical examples, worker overconfidence is a necessary condition for the firm to prefer no wage differentiation, so as to preserve some workers' morale; the non-differentiation wage policy itself breeds more worker overconfidence; finally, wage compression is more likely when aggregate productivity is low.
|Date of creation:||May 2003|
|Date of revision:|
|Publication status:||Published in Journal of Monetary Economics (May 2005), 52(4): 749-777|
|Contact details of provider:|| Postal: |
Phone: (203) 432-3702
Fax: (203) 432-6167
Web page: http://cowles.econ.yale.edu/
More information through EDIRC
|Order Information:|| Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Allen, Franklin & Gale, Douglas, 1999.
"Diversity of Opinion and Financing of New Technologies,"
Journal of Financial Intermediation,
Elsevier, vol. 8(1-2), pages 68-89, January.
- Franklin Allen & Douglas Gale, 1999. "Diversity of Opinion and Financing of New Technologies," Center for Financial Institutions Working Papers 98-30, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Allen, Franklin & Gale, Douglas, 1998. "Diversity of Opinion and Financing of New Technologies," Working Papers 98-29, C.V. Starr Center for Applied Economics, New York University.
- Morris, Stephen, 1994. "Trade with Heterogeneous Prior Beliefs and Asymmetric Information," Econometrica, Econometric Society, vol. 62(6), pages 1327-47, November.
- Ulrike Malmendier & Geoffrey Tate, 2004.
"CEO Overconfidence and Corporate Investment,"
NBER Working Papers
10807, National Bureau of Economic Research, Inc.
- Dan Lovallo & Colin Camerer, 1999. "Overconfidence and Excess Entry: An Experimental Approach," American Economic Review, American Economic Association, vol. 89(1), pages 306-318, March.
- Prendergast, Canice, 1992. "Career development and specific human capital collection," Journal of the Japanese and International Economies, Elsevier, vol. 6(3), pages 207-227, September.
- Lazear, Edward P, 1989. "Pay Equality and Industrial Politics," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 561-80, June.
- Fang, Hanming & Moscarini, Giuseppe, 2005.
Journal of Monetary Economics,
Elsevier, vol. 52(4), pages 749-777, May.
- Akerlof, George A & Yellen, Janet L, 1990. "The Fair Wage-Effort Hypothesis and Unemployment," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 255-83, May.
- Olivier Compte & Andrew Postlewaite, 2004.
American Economic Review,
American Economic Association, vol. 94(5), pages 1536-1557, December.
- Olivier Compte & Andrew Postlewaite, 2001. "Confidence-Enhanced Performance," PIER Working Paper Archive 04-023, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 01 May 2003.
- Olivier Compte & Andrew Postlewaite, 2003. "Confidence-Enhanced Performance," PIER Working Paper Archive 03-009, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- Morris, Stephen, 1995. "The Common Prior Assumption in Economic Theory," Economics and Philosophy, Cambridge University Press, vol. 11(02), pages 227-253, October.
- Cho, In-Koo & Kreps, David M, 1987.
"Signaling Games and Stable Equilibria,"
The Quarterly Journal of Economics,
MIT Press, vol. 102(2), pages 179-221, May.
- Roland Benabou & Jean Tirole, 2003.
"Intrinsic and Extrinsic Motivation,"
Review of Economic Studies,
Wiley Blackwell, vol. 70(3), pages 489-520, 07.
- Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 921-55, November.
- Julio J. Rotemberg, 2002.
"Perceptions of Equity and the Distribution of Income,"
Journal of Labor Economics,
University of Chicago Press, vol. 20(2), pages 249-288, Part.
- Julio J. Rotemberg, 1996. "Perceptions of Equity and the Distribution of Income," NBER Working Papers 5624, National Bureau of Economic Research, Inc.
- Solow, Robert M., 1979. "Another possible source of wage stickiness," Journal of Macroeconomics, Elsevier, vol. 1(1), pages 79-82.
- Kreps, David M, 1997. "Intrinsic Motivation and Extrinsic Incentives," American Economic Review, American Economic Association, vol. 87(2), pages 359-64, May.
- Linda Babcock & George Loewenstein, 1997. "Explaining Bargaining Impasse: The Role of Self-Serving Biases," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 109-126, Winter.
- Alessandro Lizzeri & Margaret A. Meyer & Nicola Persico, 2002. "The Incentive Effects of Interim Performance Evaluations," Penn CARESS Working Papers 592e9328faf6e775bf331e1c0, Penn Economics Department.
When requesting a correction, please mention this item's handle: RePEc:cwl:cwldpp:1422. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Glena Ames)
If references are entirely missing, you can add them using this form.