How Ego-threats Facilitate Contracts Based on Subjective Evaluations

Alexander Sebald () and Markus Walzl

No 08-19, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: We show that individuals’ desire to protect their self-esteem against ego-threatening feedback can mitigate moral hazard in environments with purely subjective performance evaluations. In line with evidence from social psychology we assume that agents’ react aggressively to evaluations by the principal which do not coincide with their own positive self-perceptions and thereby generate costs of conflict for the principal. We identify conditions for a positive welfare effect of increasing costs of conflict or increasing sensitivity to ego-threats, and a negative welfare effect of a more informative information technology. As a consequence, principals may choose imperfect information technologies in equilibrium even if the signal quality is costless.

Keywords: contracts; Subjective evaluations; self-esteem; ego-threats (search for similar items in EconPapers)
JEL-codes: D01 D02 D82 D86 J41 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2008-09
New Economics Papers: this item is included in nep-bec, nep-cbe and nep-cta
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Persistent link: https://EconPapers.repec.org/RePEc:kud:kuiedp:0819

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