Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/25641
Authors: 
Miettinen, Topi
Year of Publication: 
2007
Series/Report no.: 
Jena economic research papers 2007,008
Abstract: 
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.
Subjects: 
Moral Hazard
Norms
Agency
Social Preferences
JEL: 
C72
D82
Z13
Document Type: 
Working Paper

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