Optimal contracts based on subjective performance evaluations and reciprocity

Alexander Sebald () and Markus Walzl

Journal of Economic Psychology, 2015, vol. 47, issue C, 62-76

Abstract: As demonstrated in a recent laboratory experiment (see Sebald & Walzl, 2014), individuals tend to sanction others who subjectively evaluate their performance whenever this assessment falls short of the individuals’ self-evaluation. Interestingly, this is the case even if the individuals’ earnings are unaffected by the subjective performance appraisal. Hence, performance feedback which falls short of agents’ self-evaluations can be interpreted as an unkind act that triggers a negatively reciprocal response not only if the assessment determines agents’ earnings but also when it lacks monetary consequences. We propose a principal-agent model formalizing that agents might engage into conflict in response to ego-threatening performance appraisals and show that these conflicts stabilize principal-agent relationships based on subjective performance evaluations. In particular, we identify conditions for a positive welfare effect of increasing costs of conflict and a negative welfare effect of more capable agents.

Keywords: Contracts; Subjective evaluations; Self-esteem; Ego-threats; Reciprocity (search for similar items in EconPapers)
JEL-codes: D01 D02 D82 D86 J41 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:joepsy:v:47:y:2015:i:c:p:62-76

DOI: 10.1016/j.joep.2015.01.004

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