The Pygmalion and Galatea Effects: An Agency Model with Reference-Dependent Preferences and Applications to Self-Fulfilling Prophecy

Kohei Daido and Hideshi Itoh

No 35, Discussion Paper Series from School of Economics, Kwansei Gakuin University

Abstract: We attempt to formulate and explain two types of self-fulfilling prophecy, called the Pygmalion effect (if a supervisor thinks her subordinates will succeed, they are more likely to succeed) and the Galatea effect (if a person thinks he will succeed, he is more likely to succeed). To this purpose, we extend a simple agency model with moral hazard and limited liability by introducing a model of reference-dependent preferences (RDP) by K˝oszegi and Rabin (2004). We show that the agent with high expectations about his performance can be induced to choose high effort with low-powered incentives. We then argue that the principal’s expectation has an important role as an equilibrium selection device.

Keywords: Self-fulfilling prophecy; Pygmalion effect; Galatea effect; referencedependent preferences; agency model; moral hazard (search for similar items in EconPapers)
JEL-codes: B49 D82 D86 M12 M52 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2007-09, Revised 2007-09
New Economics Papers: this item is included in nep-bec
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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