Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/204715 
Authors: 
Year of Publication: 
2009
Series/Report no.: 
SITE Working Paper No. 4
Publisher: 
Stockholm School of Economics, Stockholm Institute of Transition Economics (SITE), Stockholm
Abstract: 
The paper studies theoretically how the optimal contract in the hidden-action moral hazard model is affected when an agent feels bad when not reaching a target effort set in the contract. While the presence of guilt brings the outcome closer to first-best, an effort target is not costless for the principal. In equilibrium, the agent's effort falls short of the target, inducing guilt which must be compensated by a higher financial reward. Thus, although the principal's payoff is higher, the agent receives a part of the monetary rents accruing to intrinsic motivation. This result differs markedly from previous contributions on contracting under social preference or pro-social motivation.
Subjects: 
Moral Hazard
Norms
Agency
Social Preferences
Guilt
Work Ethic
JEL: 
C72
D82
Z13
Document Type: 
Working Paper

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