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Moral Hazard and Clear Conscience

Author

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  • Topi Miettinen

    () (Max Planck Institute of Economics Jena, Strategic Interaction Group)

Abstract

We consider guilt averse agents and principals and study the effects of guilt on optimal behavior of the principal and the agent in a moral hazard model. The principal’s contract proposal contains a target effort in addition to the monetary incentive scheme. By accepting the agreement, the parties agree on both the wage scheme and the target. The agent suffers from guilt when failing to provide the target effort, the principal when paying less than the contract requires or when setting an unreasonably high target effort. In equilibrium, a guilt-prone agent chooses a higher effort than an agent who only cares about monetary incentives. The target effort level is always set above the equilibrium effort. Both the agent and the principal gain from the agent’s guilt aversion. A principal who lacks power to commit to the proposed incentive scheme benefits from having a positive proneness to guilt. However, a guilt-prone principal who suffers when setting an unreasonable target is worse off than one with merely monetary motivations.

Suggested Citation

  • Topi Miettinen, 2007. "Moral Hazard and Clear Conscience," Jena Economic Research Papers 2007-008, Friedrich-Schiller-University Jena.
  • Handle: RePEc:jrp:jrpwrp:2007-008
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    File URL: http://zs.thulb.uni-jena.de/receive/jportal_jparticle_00054353
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    References listed on IDEAS

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    Cited by:

    1. Dijk, Oege & Holmén, Martin, 2017. "Charity, incentives, and performance," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 66(C), pages 119-128.

    More about this item

    Keywords

    Moral Hazard; Norms; Agency; Social Preferences;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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