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Optimal contracts based on subjective evaluations and reciprocity

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  • Alexander Sebald

    ()

  • Markus Walzl

    ()

Abstract

s demonstrated in a recent laboratory experiment [see Sebald and Walzl (2014)], individuals tend to sanction others who subjectively evaluate their performance when-ever this assessment falls short of the individuals' self-evaluation. Interestingly, this is the case even if the individuals' earnings are unaffected by the subjective performance appraisal. Hence, performance feedback which falls short of agents' self-evaluations can be interpreted as an unkind act that triggers a negatively reciprocal response not only if the assessment determines agents' earnings but also when it lacks monetary consequences. We propose a principal-agent model formalizing that agents might engage into conflict in response to ego-threatening performance appraisals and show that these conflicts stabilize principal-agent relationships based on subjective performance evaluations. In particular, we identify conditions for a positive welfare effect of increasing costs of conflict and a negative welfare effect of more capable agents.

Suggested Citation

  • Alexander Sebald & Markus Walzl, 2012. "Optimal contracts based on subjective evaluations and reciprocity," Working Papers 2012-16, Faculty of Economics and Statistics, University of Innsbruck, revised Nov 2014.
  • Handle: RePEc:inn:wpaper:2012-16
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    References listed on IDEAS

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    1. Hall, Robert E & Jones, Charles I, 1997. "Levels of Economic Activity across Countries," American Economic Review, American Economic Association, pages 173-177.
    2. Falk, Armin & Fischbacher, Urs, 2006. "A theory of reciprocity," Games and Economic Behavior, Elsevier, pages 293-315.
    3. Dufwenberg, Martin & Kirchsteiger, Georg, 2004. "A theory of sequential reciprocity," Games and Economic Behavior, Elsevier, vol. 47(2), pages 268-298, May.
    4. Bentley W. MacLeod, 2003. "Optimal Contracting with Subjective Evaluation," American Economic Review, American Economic Association, pages 216-240.
    5. Tore Ellingsen & Magnus Johannesson, 2008. "Pride and Prejudice: The Human Side of Incentive Theory," American Economic Review, American Economic Association, pages 990-1008.
    6. Alexander Sebald & Markus Walzl, 2014. "Subjective Performance Evaluations and Reciprocity in Principal–Agent Relations," Scandinavian Journal of Economics, Wiley Blackwell, vol. 116(2), pages 570-590, April.
    7. Jonathan Levin, 2003. "Relational Incentive Contracts," American Economic Review, American Economic Association, pages 835-857.
    8. Tore Ellingsen & Magnus Johannesson, 2008. "Pride and Prejudice: The Human Side of Incentive Theory," American Economic Review, American Economic Association, pages 990-1008.
    9. Bentley W. MacLeod, 2003. "Optimal Contracting with Subjective Evaluation," American Economic Review, American Economic Association, pages 216-240.
    10. Prendergast, Canice & Topel, Robert H, 1996. "Favoritism in Organizations," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 958-978, October.
    11. Rabin, Matthew, 1993. "Incorporating Fairness into Game Theory and Economics," American Economic Review, American Economic Association, pages 1281-1302.
    12. Malcomson, James M, 1984. "Work Incentives, Hierarchy, and Internal Labor Markets," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 486-507, June.
    13. Sebald, Alexander, 2007. "Procedural Concerns," MPRA Paper 4508, University Library of Munich, Germany.
    14. Botond Köszegi, 2006. "Ego Utility, Overconfidence, and Task Choice," Journal of the European Economic Association, MIT Press, vol. 4(4), pages 673-707, June.
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    More about this item

    Keywords

    Contracts; Subjective Evaluations; Self-Esteem; Ego-Threats; Reciprocity;

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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