Salience Bias and Overwork

Fabio Römeis, Fabian Herweg and Daniel Müller
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Fabio Römeis: Chair for Contract Theory and Information Economics, University of Würzburg, Sanderring 2, D-97070 Würzburg, Germany
Fabian Herweg: Faculty of Law, Business and Economics, University of Bayreuth and CESifo, Universitätsstr. 30, D-95440 Bayreuth, Germany

Games, 2022, vol. 13, issue 1, 1-22

Abstract: In this study, we enrich a standard principal–agent model with hidden action by introducing salience-biased perception on the agent’s side. The agent’s misguided focus on salient payoffs, which leads the agent’s and the principal’s probability assessments to diverge, has two effects: First, the agent focuses too much on obtaining a bonus, which facilitates incentive provision. Second, the principal may exploit the diverging probability assessments to relax participation. We show that salience bias can reverse the nature of the inefficiency arising from moral hazard; i.e., the principal does not necessarily provide insufficient incentives that result in inefficiently low effort but instead may well provide excessive incentives that result in inefficiently high effort.

Keywords: context-dependent preferences; hidden action; moral hazard; overwork; salience theory (search for similar items in EconPapers)
JEL-codes: C C7 C70 C71 C72 C73 (search for similar items in EconPapers)
Date: 2022
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