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. 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.
|Peer-reviewed scientific journal||Journal of Institutional and Theoretical Economics|
|Number of pages||12|
|Publication status||Published - 2011|
|MoE publication type||A1 Journal article - refereed|
- 511 Economics