SITE Working Paper Series
No 4:
Moral Hazard and Clear Conscience
Topi Miettinen ()
Abstract: 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. While the presence
of guilt brings the outcome closer to first-best, an effort target is not
costless for the principal. 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.
Keywords: Moral Hazard; Norms; Agency; Social Preferences; Guilt; Work Ethic; (follow links to similar papers)
JEL-Codes: C72; D82; Z13; (follow links to similar papers)
19 pages, September 8, 2009
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