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Moral Hazard and Clear Conscience

Topi Miettinen ()

Journal of Institutional and Theoretical Economics (JITE), 2011, vol. 167, issue 2, 224-235

Abstract: The paper studies theoretically how the optimal contract in the hidden-action moral-hazard model is affected when an agent feels bad when not reaching a target effort set in the contract. In equilibrium, the agent's effort falls short of the target, inducing guilt, which must be compensated by a higher financial reward. Thus, although the principal's payoff is higher, the agent receives a part of the monetary rents accruing to intrinsic motivation. This result differs markedly from previous contributions on contracting under social preference or pro-social motivation.

JEL-codes: C72 D82 Z13 (search for similar items in EconPapers)
Date: 2011
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Working Paper: Moral Hazard and Clear Conscience (2009) Downloads
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