Social Relations and Relational Incentives
32 Pages Posted: 18 Jun 2012
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: Suggested Citation