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Are you a good employee or simply a good guy? Influence Costs and Contract Design

  • Brice Corgnet

    ()

    (Facultad de Ciencias Económicas y Empresariales, Universidad de Navarra)

  • Ismael Rodriguez Lara

    ()

    (Departamento de Fundamentos del Análisis Económico, Universidad de Alicante)

We develop a principal-agent model in which the principal has access to hard and soft information about the agent’s level of effort. We model the soft signal as being informative about the agent’s level of effort but manipulable by the agent at a cost. We show that the presence of influence activities increases the cost of implementing the efficient level of effort for the principal. We also show that the manipulability of the soft signal leads to wage compression. However, when influence costs affect negatively the agent’s productivity we establish that the design of influence-free contracts by the principal may lead to high-powered incentives. This result implies that high-productivity workers may face incentives schemes that are more responsive and give more weight to hard evidence compared to low-productivity workers.

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File URL: http://www.unav.es/facultad/econom/files/workingpapersmodule/@random497080f7805d2/1257154547_WP_UNAV_13_09.pdf
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Paper provided by School of Economics and Business Administration, University of Navarra in its series Faculty Working Papers with number 13/09.

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Length: 38 pages
Date of creation: 02 Nov 2009
Date of revision:
Handle: RePEc:una:unccee:wp1309
Contact details of provider: Web page: http://www.unav.es/facultad/econom

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  15. Keith J. Crocker & John Morgan, 1998. "Is Honesty the Best Policy? Curtailing Insurance Fraud through Optimal Incentive Contracts," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 355-375, April.
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  17. Faure-Grimaud, Antoine & Laffont, Jean-Jacques & Martimort, David, 2003. "Collusion, Delegation and Supervision with Soft Information," IDEI Working Papers 167, Institut d'Économie Industrielle (IDEI), Toulouse.
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  19. Tirole, Jean, 1986. "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(2), pages 181-214, Fall.
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  23. Giovanni Maggi & Andres Rodriguez-Clare, 1995. "Costly Distortion of Information in Agency Problems," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 675-689, Winter.
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