Social Relations and Relational Incentives

32 Pages Posted: 18 Jun 2012

See all articles by Robert Dur

Robert Dur

Erasmus University Rotterdam (EUR) - Department of Economics; Tinbergen Institute; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Jan Tichem

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: May 31, 2012

Abstract

This paper studies how social relationships between managers and employees affect relational incentive contracts. To this end we develop a simple dynamic principal-agent model where both players may have feelings of altruism or spite toward each other. The contract may contain two types of incentives for the agent to work hard: a bonus and a threat of dismissal. We find that good social relationships undermine the credibility of a threat of dismissal but strengthen the credibility of a bonus. Among others, these two mechanisms imply that better social relationships sometimes lead to higher bonuses, while worse social relationships may increase productivity and players’ utility in equilibrium.

Keywords: altruism, spite, social relations, incentives, relational contracts, efficiency wages, subjective performance evaluation, Nash bargaining

JEL Classification: D230, J330, M520, M550

Suggested Citation

Dur, Robert and Tichem, Jan, Social Relations and Relational Incentives (May 31, 2012). CESifo Working Paper Series No. 3826, Available at SSRN: https://ssrn.com/abstract=2084060 or http://dx.doi.org/10.2139/ssrn.2084060

Robert Dur (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Economics ( email )

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Tinbergen Institute

Amsterdam/Rotterdam
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CESifo (Center for Economic Studies and Ifo Institute)

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IZA Institute of Labor Economics

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Bonn, D-53072
Germany

Jan Tichem

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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