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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.

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File URL: http://mpra.ub.uni-muenchen.de/3141/1/MPRA_paper_3141.pdf
File Function: original version
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3141.

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Date of creation: 03 Sep 2003
Date of revision: 14 Feb 2007
Handle: RePEc:pra:mprapa:3141
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Web page: http://mpra.ub.uni-muenchen.de

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  1. Rabin, Matthew, 1997. "Psychology and Economics," Department of Economics, Working Paper Series qt8jd5z5j2, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  2. 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.
  3. de la Rosa, Leonidas Enrique, 2011. "Overconfidence and moral hazard," Games and Economic Behavior, Elsevier, vol. 73(2), pages 429-451.
  4. Mookherjee, Dilip, 1984. "Optimal Incentive Schemes with Many Agents," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 433-46, July.
  5. Roland Bénabou & Jean Tirole, 2003. "Intrinsic and Extrinsic Motivation," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 489-520.
  6. Hanming Fang & Giuseppe Moscarini, 2004. "Morale Hazard," Yale School of Management Working Papers ysm386, Yale School of Management.
  7. Brozynski, Torsten & Menkhoff, Lukas & Schmidt, Ulrich, 2004. "The Impact of Experience on Risk Taking, Overconfidence, and Herding of Fund Managers: Complementary Survey Evidence," Hannover Economic Papers (HEP) dp-292, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  8. Sanford Grossman & Oliver Hart, . "An Analysis of the Principal-Agent Problem," Rodney L. White Center for Financial Research Working Papers 15-80, Wharton School Rodney L. White Center for Financial Research.
  9. Hvide, Hans K., 2002. "Pragmatic beliefs and overconfidence," Journal of Economic Behavior & Organization, Elsevier, vol. 48(1), pages 15-28, May.
  10. Thomas Oberlechner & Carol Osler, 2009. "Overconfidence in Currency Markets," Working Papers 02, Brandeis University, Department of Economics and International Businesss School.
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