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Positive self-image and incentives in organizations

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  • Santos-Pinto, Luís

Abstract

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

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    More about this item

    Keywords

    Positive Self-Image; Incentives; Moral Hazard; Behavioral Economics;
    All these keywords.

    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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