Morale Hazard

Hanming Fang () and Giuseppe Moscarini ()

Yale School of Management Working Papers from Yale School of Management

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.

Keywords: Overconfidence; Worker Morale; Wage-setting Policies (search for similar items in EconPapers)
JEL-codes: D82 J31 (search for similar items in EconPapers)
Date: 2004-07-28
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Related works:
Working Paper: Morale Hazard (2003)
Journal Article: Morale hazard (2005)
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Persistent link: http://EconPapers.repec.org/RePEc:ysm:somwrk:ysm386

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