Gift-Exchange, Incentives, and Heterogeneous Workers
Tinbergen Institute discussion paper 10-008/1
36 Pages Posted: 10 Jan 2010
There are 3 versions of this paper
Gift-Exchange, Incentives, and Heterogeneous Workers
Gift-Exchange, Incentives, and Heterogeneous Workers
Date Written: January 6, 2010
Abstract
Using a formal principal-agent model, I investigate the relation between monetary gift-exchange and incentive pay, while allowing for worker heterogeneity. I assume that some agents care more for their principal when they are convinced that the principal cares for them. Principals can signal their altruism by offering a generous contract, consisting of a base salary and an output-contingent bonus. I find that principals signal their altruism by offering relatively weak incentives and a relatively high expected total compensation, but the latter does not necessarily hold. Furthermore, since some agents do not reciprocate the principal's altruism, the principal may find it optimal to write a contract that simultaneously signals his altruism and screens reciprocal worker types. I show that such a contract is characterised by excessively strong incentives and relatively high expected total compensation.
Keywords: reciprocity, gift-exchange, signaling game, incentive contracts, screening
JEL Classification: D86, J41, M52, M55
Suggested Citation: Suggested Citation
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