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Other-Regarding Preferences in Organizational Hierarchies

Kemal Saygili () and Serkan Küçükşenel ()
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Kemal Saygili: Department of Economics, Middle East Technical University, Ankara, Turkey

No 1802, ERC Working Papers from ERC - Economic Research Center, Middle East Technical University

Abstract: In this paper, we provide new theoretical insights about the role of collusion in organizational hierarchies by combining the standard principal-supervisor-agent framework with a theory of social preferences. Extending Tirole’s (1986) model of hierarchy with the inclusion of Fehr and Schmidt’s (1999) distributional other-regarding preferences approach, the links between inequity aversion, collusive behavior throughout the levels of a hierarchy and the changes in optimal contracts are studied. It turns out that other-regarding preferences do change the collusive behavior among parties depending on the nature of both the agent’s and the supervisor’s other-regarding preferences. Most prominent impact is on the optimal effort levels. When the agent is inequity averse principal can exploit this fact to make agent exert higher effort level than she would otherwise. In order to satisfy the participation constraint of the supervisor, the effort level induced for the agent becomes lower when the supervisor is status seeker, and it is higher when the supervisor is inequity averse.

Keywords: Other-Regarding Preferences; Hierarchy; Collusive Behavior; Optimal Contract Design (search for similar items in EconPapers)
JEL-codes: D82 D90 L22 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2018-02, Revised 2018-02
New Economics Papers: this item is included in nep-cta, nep-mic and nep-upt
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http://erc.metu.edu.tr/en/system/files/menu/series18/1802.pdf First version, 2018 (application/pdf)

Related works:
Journal Article: Other-regarding preferences in organizational hierarchies (2019) Downloads
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