Social Relations and Relational Incentives
2012-05-16
Research Paper
pp 1-33.
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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.
Keywords
- altruism
- incentives
- social relations
- Nash bragaining
- efficiency wages
- rational contracts
- spite
- subjective performance evaluation
Classifications using
Journal of Economic Literature (JEL) Classification System
- M52 : Compensation and Compensation Methods and Their Effects (stock options, fringe benefits, incentives, family support programs, seniority issues)
- J33 : Compensation Packages; Payment Methods
- D23 : Organizational Behavior; Transaction Costs; Property Rights
Automatically Extracted Terms
- contract
- agent
- e ffort
- bonus
- incentive
- relationship
- player
- threat
- dismissal
- utility
- altruism
- journal
- e fficiency wages
- credibility
- performance
- compensation
- result
- model
- manager
- economic
