Optimal Incentives Under Gift Exchange

Hayat Khan

The B.E. Journal of Theoretical Economics, 2020, vol. 20, issue 1, 11

Abstract: This paper studies optimal incentives in the presence of an agent’s preference for generosity, where the principal optimally chooses the level of generosity (rent) as well as the performance-based pay. We show that some minimum level of reciprocity is required for generous contracts to become attractive. More reciprocal agents exert greater effort, but they may not necessarily receive more generous offers, as our model predicts a hump-shaped relationship between generosity and the reciprocity parameter. This means that moderately reciprocal agents tend to receive a premium relative to weakly or strongly reciprocal agents. Generosity and performance-based pay are likely to behave as complements when risk-sharing motives (determined by noise in the environment and the agent’s degree of risk-aversion) are strong, and they are likely to behave as substitutes when risk-sharing motives are relatively moderate. Moreover, base-wage gifts are always optimal, whereas piece-rate or composite gifts are only optimal in a low-noise environment.

Keywords: reciprocity; gift exchange; incentives; piece-rate gifts; composite gifts (search for similar items in EconPapers)
JEL-codes: D60 D82 (search for similar items in EconPapers)
Date: 2020
References: Add references at CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1515/bejte-2018-0041 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bpj:bejtec:v:20:y:2020:i:1:p:11:n:4

Ordering information: This journal article can be ordered from
https://www.degruyter.com/journal/key/bejte/html

DOI: 10.1515/bejte-2018-0041

Access Statistics for this article

The B.E. Journal of Theoretical Economics is currently edited by Burkhard C. Schipper

More articles in The B.E. Journal of Theoretical Economics from De Gruyter
Bibliographic data for series maintained by Peter Golla ().