Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/322896 
Year of Publication: 
2013
Series/Report no.: 
Discussion Papers Series No. 13-04
Publisher: 
Utrecht University, Utrecht School of Economics, Tjalling C. Koopmans Research Institute, Utrecht
Abstract: 
We provide a hidden-action principal-agent model where the agent has referencedependent preferences. The loss-averse agent considers the base wage as reference point, and bonuses and/or penalties as gains and losses, respectively. When choosing optimal payments, the principal strategically sets the base wage, knowing that this determines the agent's reference point. We consider two variants of the model. In a first variant, the agent's reservation utility is not reference-dependent. We show that it is always optimal in this case for the principal to employ bonuses. In a second variant, the reservation utility is reference-dependent and the principal may use penalties.
Subjects: 
Strategic Framing
Reference-Dependent Preferences
Principal-Agent Theory
Optimal Payment Schemes
Employment Contracts
Document Type: 
Working Paper

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