Moral Hazard and Clear Conscience
Topi Miettinen ()
No 4, SITE Working Paper Series from Stockholm School of Economics, Stockholm Institute of Transition Economics
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. While the presence of guilt brings the outcome closer to first-best, an effort target is not costless for the principal. 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.
Keywords: Moral Hazard; Norms; Agency; Social Preferences; Guilt; Work Ethic (search for similar items in EconPapers)
JEL-codes: C72 D82 Z13 (search for similar items in EconPapers)
Pages: 19 pages
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Journal Article: Moral Hazard and Clear Conscience (2011)
Working Paper: Moral Hazard and Clear Conscience (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:hasite:0004
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