Resource title

Moral hazard and clear conscience

Resource image

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Resource description

We consider guilt averse agents and principals and study the effects of guilt on optimal behavior of the principal and the agent in a moral hazard model. The principal s contract proposal contains a target effort in addition to the monetary incentive scheme. By accepting the agreement, the parties agree on both the wage scheme and the target. The agent suffers from guilt when failing to provide the target effort, the principal when paying less than the contract requires or when setting an unreasonably high target effort. In equilibrium, a guilt-prone agent chooses a higher effort than an agent who only cares about monetary incentives. The target effort level is always set above the equilibrium effort. Both the agent and the principal gain from the agent s guilt aversion. A principal who lacks power to commit to the proposed incentive scheme benefits from having a positive proneness to guilt. However, a guilt-prone principal who suffers when setting an unreasonable target is worse off than one with merely monetary motivations.

Resource author

Topi Miettinen

Resource publisher

Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/25641

Resource license

Adapt according to the presented license agreement and reference the original author.