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Efficiency Wages with Motivated Agents

Jesper Armouti-Hansen, Lea Cassar () and Anna Deréky

No 8474, CESifo Working Paper Series from CESifo

Abstract: Many organizations nowadays combine profits with a social mission. This paper reveals a new hidden benefit of the mission: its role in facilitating the emergence of efficiency wages. We show that in a standard gift exchange principals highly underestimate agents’ reciprocity and thereby offer wages that are much lower than the profit-maximizing level. This bias has a high social cost: if principals had correct beliefs and thus offered the profit-maximizing wage, efficiency would increase by 86 percent. However, the presence of a social mission (in the form of a positive externality generated by the agent’s effort), by increasing principals’ trust, acts as a debiasing mechanism. Thereby efficiency is increased by 50 percent. These results contribute to our understanding of behavior in mission-oriented organizations and to the debate about the relevance of reciprocity in the workplace and open new questions about belief formation in prosocial contexts.

Keywords: mission motivation; gift exchange; biased beliefs; efficiency wages (search for similar items in EconPapers)
JEL-codes: D23 M52 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-cbe, nep-hrm and nep-soc
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