Contracting with Self-Esteem Concerns

Junichiro Ishida

No 06E004, OSIPP Discussion Paper from Osaka School of International Public Policy, Osaka University

Abstract: It is widely accepted in social psychology that the need to maintain and enhance self-esteem is a fundamental human motive. We incorporate this factor into an otherwise ordinary principal-agent framework and examine its impact on the optimal incentive scheme and the agent's behavior, especially focusing on a form of intrapersonal strategy known as self-handicapping. Incorporating self-esteem concerns into a contracting situation yields an implication that goes against the conventional wisdom: the standard tradeoff between risk and incentives may break down in the presence of self-esteem concerns because uncertainty mitigates the need for self-handicapping, providing a potential reason for why we do not empirically observe this tradeoff in a robust manner. We characterize an intuitive condition for this anomaly to arise and present a set of testable implications. Along the way, we also show that the fragility of self-esteem (the variance) is just as important as its level (the mean) in selecting agents. Finally, this simple logic is applied to a team problem to show why and how people are better motivated under team production than under individual production.

Keywords: Self-esteem; Bayesian learning; Tradeoff between risk and incentives; Contract (search for similar items in EconPapers)
JEL-codes: D81 D86 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2006-09
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Related works:
Journal Article: Contracting with self-esteem concerns (2012)
Working Paper: Contracting with Self-Esteem Concerns (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:osp:wpaper:06e004

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