Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/18808
Authors: 
Daido, Kohei
Itoh, Hideshi
Year of Publication: 
2005
Series/Report no.: 
CESifo Working Paper 1444
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'szegi 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 show that the principal's expectation has an important role as an equilibrium selection device.
Subjects: 
self-fulfilling prophecy
Pygmalion effect
Galatea effect
reference dependent preferences
agency model
moral hazard
JEL: 
M12
M54
M52
D82
B49
Document Type: 
Working Paper

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