We study the relation between formal incentives and social exchange in organizations where employees work for several managers and reciprocate to a manager's attention with higher effort. To this end we develop a common agency model with two-sided moral hazard. We show that when effort is contractible and attention is not, the first-best can be achieved through bonus pay for both managers and employees. When neither effort nor attention are contractible, an 'attention race' arises, as each manager tries to sway the employee's effort his way. While this may result in too much social exchange, the attention race may also be a blessing because it alleviates managers' moral-hazard problem in attention provision. Lastly, we derive the implications of these contract imperfections for optimal organizational design.

common agency, incentive contracts, organizational design, reciprocity, social exchange
Economics of Contract Law (jel D86), Contracts: Specific Human Capital, Matching Models, Efficiency Wage Models, and Internal Labor Markets (jel J41), Personnel Economics: General (jel M50), Labor Management (team formation, worker empowerment, job design, tasks and authority, job satisfaction) (jel M54), Labor Contracting Devices: Outsourcing; Franchising; Other (jel M55)
hdl.handle.net/1765/8343
Tinbergen Institute Discussion Paper Series
Discussion paper / Tinbergen Institute
Tinbergen Institute

Roelfsema, H.J, & Dur, A.J. (2006). Social Exchange and Common Agency in Organizations (No. TI 06-111/1). Discussion paper / Tinbergen Institute. Retrieved from http://hdl.handle.net/1765/8343