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Contracting with Self-Esteem Concerns

  • Junichiro Ishida

    (Osaka School of International Public Policy, Osaka University)

It is widely accepted in social psychology that the need to maintain and enhance self-esteem is a fundamental human motive. We incorporate this factor into an otherwise ordinary principal-agent framework and examine its impact on the optimal incentive scheme and the agent's behavior, especially focusing on a form of intrapersonal strategy known as self-handicapping. Incorporating self-esteem concerns into a contracting situation yields an implication that goes against the conventional wisdom: the standard tradeoff between risk and incentives may break down in the presence of self-esteem concerns because uncertainty mitigates the need for self-handicapping, providing a potential reason for why we do not empirically observe this tradeoff in a robust manner. We characterize an intuitive condition for this anomaly to arise and present a set of testable implications. Along the way, we also show that the fragility of self-esteem (the variance) is just as important as its level (the mean) in selecting agents. Finally, this simple logic is applied to a team problem to show why and how people are better motivated under team production than under individual production.

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Paper provided by Osaka School of International Public Policy, Osaka University in its series OSIPP Discussion Paper with number 06E004.

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Length: 25 pages
Date of creation: Sep 2006
Date of revision:
Handle: RePEc:osp:wpaper:06e004
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  1. Michael Raith, 2003. "Competition, Risk, and Managerial Incentives," American Economic Review, American Economic Association, vol. 93(4), pages 1425-1436, September.
  2. Daniel A. Ackerberg & Maristella Botticini, 2002. "Endogenous Matching and the Empirical Determinants of Contract Form," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 564-591, June.
  3. Yeon-Koo Che & Seung-Weon Yoo, 2001. "Optimal Incentives for Teams," American Economic Review, American Economic Association, vol. 91(3), pages 525-541, June.
  4. repec:tpr:qjecon:v:117:y:2002:i:3:p:871-915 is not listed on IDEAS
  5. Christian Grund & Dirk Sliwka, 2002. "Envy and Compassion in Tournaments," Bonn Econ Discussion Papers bgse32_2002, University of Bonn, Germany.
  6. repec:bla:restud:v:67:y:2000:i:3:p:529-44 is not listed on IDEAS
  7. Bénabou, Roland & Tirole, Jean, 2004. "Incentives and Prosocial Behaviour," CEPR Discussion Papers 4633, C.E.P.R. Discussion Papers.
  8. repec:bla:restud:v:66:y:1999:i:1:p:169-82 is not listed on IDEAS
  9. Englmaier, Florian & Wambach, Achim, 2005. "Optimal Incentive Contracts under Inequity Aversion," IZA Discussion Papers 1643, Institute for the Study of Labor (IZA).
  10. Frey, Bruno S & Oberholzer-Gee, Felix, 1997. "The Cost of Price Incentives: An Empirical Analysis of Motivation Crowding-Out," American Economic Review, American Economic Association, vol. 87(4), pages 746-55, September.
  11. Canice Prendergast, 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1071-1102, October.
  12. Bauke Visser, 2007. "Motivating Through Delegating Tasks or Giving Attention," Journal of Law, Economics and Organization, Oxford University Press, vol. 23(3), pages 731-742, October.
  13. Jonathan Levin, 2000. "Relational Incentive Contracts," Working Papers 01002, Stanford University, Department of Economics.
  14. Mathias Dewatripont & Ian Jewitt & Jean Tirole, 1999. "The economics of career concerns: part 1 :comparing information structures," ULB Institutional Repository 2013/9617, ULB -- Universite Libre de Bruxelles.
  15. Bentley W. MacLeod, 2003. "Optimal Contracting with Subjective Evaluation," American Economic Review, American Economic Association, vol. 93(1), pages 216-240, March.
  16. Hideshi Itoh, 2004. "Moral Hazard and Other-Regarding Preferences," The Japanese Economic Review, Japanese Economic Association, vol. 55(1), pages 18-45.
  17. Junichiro Ishida, 2006. "Team Incentives under Relative Performance Evaluation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(1), pages 187-206, 03.
  18. Benabou, R. & Tirole, J., 2001. "Willpower and Personal Rules," Papers 216, Princeton, Woodrow Wilson School - Public and International Affairs.
  19. Cowen, Tyler & Glazer, Amihai, 2007. "Esteem and ignorance," Journal of Economic Behavior & Organization, Elsevier, vol. 63(3), pages 373-383, July.
  20. Sliwka, Dirk, 2006. "Trust as a Signal of a Social Norm and the Hidden Costs of Incentive Schemes," IZA Discussion Papers 2293, Institute for the Study of Labor (IZA).
  21. Jin, Li, 2002. "CEO compensation, diversification, and incentives," Journal of Financial Economics, Elsevier, vol. 66(1), pages 29-63, October.
  22. Canice Prendergast, 2000. "What Trade-Off of Risk and Incentives?," American Economic Review, American Economic Association, vol. 90(2), pages 421-425, May.
  23. repec:tpr:qjecon:v:115:y:2000:i:3:p:791-810 is not listed on IDEAS
  24. Bengt Holmstrom, 1999. "Managerial Incentive Problems: A Dynamic Perspective," NBER Working Papers 6875, National Bureau of Economic Research, Inc.
  25. Junichiro Ishida, 2006. "Optimal Promotion Policies with the Looking-Glass Effect," Journal of Labor Economics, University of Chicago Press, vol. 24(4), pages 857-878, October.
  26. Kreps, David M, 1997. "Intrinsic Motivation and Extrinsic Incentives," American Economic Review, American Economic Association, vol. 87(2), pages 359-64, May.
  27. Botond Köszegi, 2006. "Ego Utility, Overconfidence, and Task Choice," Journal of the European Economic Association, MIT Press, vol. 4(4), pages 673-707, 06.
  28. Roland Bénabou & Jean Tirole, 2003. "Intrinsic and Extrinsic Motivation," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 489-520.
  29. Itoh Hideshi, 1993. "Coalitions, Incentives, and Risk Sharing," Journal of Economic Theory, Elsevier, vol. 60(2), pages 410-427, August.
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