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Friends or Foes? Optimal Incentives for Reciprocal Agents

Luca Livio ()

No 2018-03, Working Papers ECARES from ULB -- Universite Libre de Bruxelles

Abstract: Widely used performance-based contracts put (positive or negative) externalities on co-workers. These externalities have been proven to shape an organization’s working climate especially when workers exhibit social preferences. However, it is a priori unclear whether a more friendly or a more competitive working environment should be encouraged. In this paper I consider a theoretical model in which a self-interested principal has to motivate a set of agents. Agents are symmetric, potentially risk-averse and exhibit reciprocity concerns towards each other. The optimal incentive scheme is derived solving a psychological game with asymmetric information about effort choices. I show that the optimal incentive design depends on the interplay between the agents’ attitudes towards risks and their preferences for reciprocity. In particular, the optimal scheme implements (i) a relative performance compensation scheme which induces an exchange of unkindness if agents are relatively little risk averse and (ii) a joint performance compensation scheme which induces an exchange of kindness if agents are sufficiently risk averse. My findings can explain some puzzling empirical results.

Keywords: Gift Exchange; Group Production; Incentives; Moral Hazard; Reciprocity; Team; Tournament (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta, nep-hrm and nep-mic
Date: 2018-01
References: View references in EconPapers View complete reference list from CitEc
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