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Social Exchange and Common Agency in Organizations

We study the relation between formal incentives and social exchange in organizations where employees work for several managers and reciprocate to a manager's attention with higher effort. To this end, we develop a common agency model with two-sided moral hazard. We show that when effort is contractible and attention is not, the first-best can be achieved through bonus pay for both managers and employees. When neither effort nor attention are contractible, an `attention race' arises, as each manager tries to sway the employee's effort his way. While this may result in too much social exchange, the attention race may also be a blessing because it alleviates managers' moral-hazard problem in attention provision. Lastly, we derive the implications of these contract imperfections for the optimal number of managers that share one employee.

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File URL: http://dspace.library.uu.nl/bitstream/handle/1874/37088/06-11.pdf
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Paper provided by Utrecht School of Economics in its series Working Papers with number 11-11.

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Date of creation: 2006
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Handle: RePEc:use:tkiwps:1111
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