Moral Hazard and Clear Conscience - 10.1628/093245611796589960 - Mohr Siebeck

Topi Miettinen

Moral Hazard and Clear Conscience

Volume 167 () / Issue 2, pp. 224-235 (12)

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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.

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