Team Incentives and Reference-Dependent Preferences

Kohei Daido and Takeshi Murooka

No 70, Discussion Paper Series from School of Economics, Kwansei Gakuin University

Abstract: This paper examines a multi-agent moral hazard model in which agents have expectation-based reference-dependent preferences `a la K˝oszegi and Rabin (2006, 2007). The agents’ utilities depend not only on their realized outcomes but also on the comparisons of their realized outcomes with their reference outcomes. Due to loss aversion, the agents have a first-order aversion to wage uncertainty. Thus, reducing their expected losses by partially compensating for their failure may be beneficial for the principal. When the agent is loss averse and the project is hard to achieve, the optimal contract is based on team incentives which exhibit either joint performance evaluation or relative performance evaluation. Our results provide a new insight: team incentives serve as a loss-sharing device among agents. This model can explain the empirical puzzle of why firms often pay a bonus to low-performance employees as well as high-performance employees.

Keywords: Moral Hazard; Team Incentives; Reference-Dependent Preferences; Loss Aversion; Joint Performance; Evaluation; Relative Performance Evaluation (search for similar items in EconPapers)
JEL-codes: D86 M12 M52 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2011-05, Revised 2011-05
New Economics Papers: this item is included in nep-bec, nep-cta, nep-hrm, nep-ppm and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Related works:
Journal Article: Team Incentives and Reference‐Dependent Preferences (2016)
Working Paper: Team Incentives and Reference-Dependent Preferences (2016)
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