Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/58345 
Year of Publication: 
2012
Series/Report no.: 
CESifo Working Paper No. 3826
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This paper studies how social relationships between managers and employees affect relational incentive contracts. To this end we develop a simple dynamic principal-agent model where both players may have feelings of altruism or spite toward each other. The contract may contain two types of incentives for the agent to work hard: a bonus and a threat of dismissal. We find that good social relationships undermine the credibility of a threat of dismissal but strengthen the credibility of a bonus. Among others, these two mechanisms imply that better social relationships sometimes lead to higher bonuses, while worse social relationships may increase productivity and players' utility in equilibrium.
Subjects: 
altruism
spite
social relations
incentives
relational contracts
efficiency wages
subjective performance evaluation
Nash bargaining
JEL: 
D23
J33
M52
M55
Document Type: 
Working Paper
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