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Optimal contracting with endogenous project mission

  • Lea Cassar

Empirical evidence shows that workers care about the mission of their job in addition to their wage. This suggests that employers can use the job mission to incentivize and screen their workers. I study a model in which a principal selects an agent to develop a project and influences the agent's ex post level of effort not by outcome- contingent rewards, but by the choice of the project mission. The principal's and the agents' preferences about the mission are misaligned and the degree to which an agent cares about the mission is private information. I derive the optimal mechanism (allocation rule, project mission, payment) to select and motivate the agent. I show that under the optimal mechanism the project mission is distorted towards the principal's ideal mission compared to the full information optimum. As a consequence, effort is lower. If the mission must be chosen prior to the allocation of the project, competition brings the principal to align the mission more with the agent's preferences, which increases his effort. Finally, in the presence of budget constraints, the principal should offer the same mission and the same payment to all types of agents. Several applications and links to the empirical evidence are discussed.

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Paper provided by Department of Economics - University of Zurich in its series ECON - Working Papers with number 150.

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Date of creation: Mar 2014
Date of revision: Oct 2014
Handle: RePEc:zur:econwp:150
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