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Positive self-image and incentives in organizations


  • Santos-Pinto, Luís


This paper investigates the implications of individuals’ mistaken beliefs of their abilities on incentives in organizations using the principal-agent model of moral hazard. The paper shows that if effort is observable, then an agent’s mistaken beliefs about own ability are always favorable to the principal. However, if effort is unobservable, then an agent’s mistaken beliefs about own ability can be either favorable or unfavorable to the principal. The paper provides conditions under which an agent’s over estimation about own ability is favorable to the principal when effort is unobservable. Finally, the paper shows that workers’ mistaken beliefs about their coworkers’ abilities make interdependent incentive schemes more attractive to firms than individualistic incentive schemes.

Suggested Citation

  • Santos-Pinto, Luís, 2003. "Positive self-image and incentives in organizations," MPRA Paper 3141, University Library of Munich, Germany, revised 14 Feb 2007.
  • Handle: RePEc:pra:mprapa:3141

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    References listed on IDEAS

    1. Baker, George P & Jensen, Michael C & Murphy, Kevin J, 1988. " Compensation and Incentives: Practice vs. Theory," Journal of Finance, American Finance Association, vol. 43(3), pages 593-616, July.
    2. Menkhoff, Lukas & Schmidt, Ulrich & Brozynski, Torsten, 2006. "The impact of experience on risk taking, overconfidence, and herding of fund managers: Complementary survey evidence," European Economic Review, Elsevier, vol. 50(7), pages 1753-1766, October.
    3. de la Rosa, Leonidas Enrique, 2011. "Overconfidence and moral hazard," Games and Economic Behavior, Elsevier, vol. 73(2), pages 429-451.
    4. Hvide, Hans K., 2002. "Pragmatic beliefs and overconfidence," Journal of Economic Behavior & Organization, Elsevier, vol. 48(1), pages 15-28, May.
    5. Dilip Mookherjee, 1984. "Optimal Incentive Schemes with Many Agents," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 433-446.
    6. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.
    7. Fang, Hanming & Moscarini, Giuseppe, 2005. "Morale hazard," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 749-777, May.
    8. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
    9. Thomas Oberlechner & Carol Osler, 2009. "Overconfidence in Currency Markets," Working Papers 02, Brandeis University, Department of Economics and International Businesss School.
    10. Roland Bénabou & Jean Tirole, 2003. "Intrinsic and Extrinsic Motivation," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 489-520.
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    Cited by:

    1. Isabelle Vialle & Luis Santos-Pinto & Jean-Louis Rullière, 2011. "Self-Confidence and Teamwork : An Experimental Test," Working Papers 1126, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    2. Sandra Ludwig & Julia Nafziger, 2011. "Beliefs about overconfidence," Theory and Decision, Springer, vol. 70(4), pages 475-500, April.
    3. Anja Sautmann, 2013. "Contracts for Agents with Biased Beliefs: Some Theory and an Experiment," American Economic Journal: Microeconomics, American Economic Association, vol. 5(3), pages 124-156, August.
    4. Botond Köszegi, 2014. "Behavioral Contract Theory," Journal of Economic Literature, American Economic Association, vol. 52(4), pages 1075-1118, December.
    5. Leonidas Enrique De La Rosa, 2008. "Overconfidence in a Career-Concerns Setting," CESifo Working Paper Series 2405, CESifo Group Munich.
    6. Sandra Ludwig & Julia Nafziger, 2007. "Do You Know That I Am Biased? An Experiment," Bonn Econ Discussion Papers bgse11_2007, University of Bonn, Germany.
    7. Inés Macho-Stadler & David Pérez-Castrillo, 2016. "Moral Hazard: Base Models and Two Extensions," Working Papers 883, Barcelona Graduate School of Economics.
    8. Dohmen, Thomas, 2014. "Behavioral labor economics: Advances and future directions," Labour Economics, Elsevier, vol. 30(C), pages 71-85.
    9. Thoma, Carmen, 2013. "Is Underconfidence Favored over Overconfidence? An Experiment on the Perception of a Biased Self-Assessment," Discussion Papers in Economics 17460, University of Munich, Department of Economics.
    10. Auster, Sarah, 2013. "Asymmetric awareness and moral hazard," Games and Economic Behavior, Elsevier, vol. 82(C), pages 503-521.
    11. Valeria Maggian & Antonio Nicolò, 2016. "The wrong man for the job: biased beliefs and job mismatching," Post-Print halshs-01324733, HAL.
    12. FOSCHI, Matteo; SANTOS-PINTO, Luís Pedro, 2017. "Subjective Performance Evaluation of Employees with Biased Beliefs," Economics Working Papers ECO 2017/08, European University Institute.
    13. Sarah Auster, 2012. "Asymmetric Awareness and Moral Hazard," Economics Working Papers ECO2012/23, European University Institute.
    14. Carmen Thoma, 2016. "Under- versus overconfidence: an experiment on how others perceive a biased self-assessment," Experimental Economics, Springer;Economic Science Association, vol. 19(1), pages 218-239, March.
    15. Sloof, Randolph & van Praag, C. Mirjam, 2010. "The effect of noise in a performance measure on work motivation: A real effort laboratory experiment," Labour Economics, Elsevier, vol. 17(5), pages 751-765, October.
    16. de la Rosa, Leonidas Enrique, 2011. "Overconfidence and moral hazard," Games and Economic Behavior, Elsevier, vol. 73(2), pages 429-451.
    17. Legge, Stefan & Schmid, Lukas, 2013. "Rankings, Random Successes, and Individual Performance," Economics Working Paper Series 1340, University of St. Gallen, School of Economics and Political Science.
    18. Donald Cox & Beth J. Soldo, 2004. "Motivation for Money and Care that Adult Children Provide for Parents: Evidence from "Point-Blank" Survey Questions," Working Papers, Center for Retirement Research at Boston College 2004-17, Center for Retirement Research.
    19. Kim, Jaesoo, 2015. "Managerial beliefs and incentive policies," Journal of Economic Behavior & Organization, Elsevier, vol. 119(C), pages 84-95.
    20. Sarah Auster, 2011. "Asymmetric Awareness and Moral Hazard," Economics Working Papers ECO2011/, European University Institute.
    21. Ludwig, Sandra & Wichardt, Philip C. & Wickhorst, Hanke, 2011. "On the Positive Effects of Overcon fident Self-Perception in Teams," Discussion Papers in Economics 12246, University of Munich, Department of Economics.
    22. Luís Santos-Pinto, 2012. "Labor Market Signaling and Self-Confidence: Wage Compression and the Gender Pay Gap," Journal of Labor Economics, University of Chicago Press, vol. 30(4), pages 873-914.
    23. Philipp Weinschenk, 2010. "Moral Hazard and Ambiguity," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2010_39, Max Planck Institute for Research on Collective Goods.

    More about this item


    Positive Self-Image; Incentives; Moral Hazard; Behavioral Economics;

    JEL classification:

    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines


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