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Morale Hazard

Author

Listed:
  • Hanming Fang

    (Yale University, Faculty of Arts & Sciences, Department of Economics (Box 8268))

  • Giuseppe Moscarini

    (Yale University, Faculty of Arts & Sciences, Department of Economics (Box 8268))

Abstract

We interpret workers' confidence in their own skills as their morale, and investigate the implication of worker overconfidence on the firm's optimal wage-setting policies. In our model, wage contracts both provide incentives and affect worker morale, by revealing private information of the firm about worker skills. We provide conditions for the non-differentiation wage policy to be profit-maximizing. In numerical examples, worker overconfidence is a necessary condition for the firm to prefer no wage differentiation, so as to preserve some workers' morale; the non-differentiation wage policy itself breeds more worker overconfidence; finally, wage compression is more likely when aggregate productivity is low.

Suggested Citation

  • Hanming Fang & Giuseppe Moscarini, 2004. "Morale Hazard," Yale School of Management Working Papers ysm386, Yale School of Management.
    • Handle: RePEc:ysm:somwrk:ysm386
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    Keywords

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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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