Morale Hazard

37 Pages Posted: 10 Jun 2003

See all articles by Hanming Fang

Hanming Fang

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Giuseppe Moscarini

Yale University - Department of Economics; Cowles Foundation for Research in Economics

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Date Written: May 2003

Abstract

We interpret workers' confidence in their own skills as their morale, and investigate the implication of worker overconfidence on the firm's optimal wage-setting policies. In our model, wage contracts both provide incentives and affect worker morale, by revealing private information of the firm about worker skills. We provide conditions for the non-differentiation wage policy to be profit-maximizing. In numerical examples, worker overconfidence is a necessary condition for the firm to prefer no wage differentiation, so as to preserve some workers' morale; the non-differentiation wage policy itself breeds more worker overconfidence; finally, wage compression is more likely when aggregate productivity is low.

Keywords: Overconfidence, Worker Morale, Wage-setting Policies

JEL Classification: J31, D82

Suggested Citation

Fang, Hanming and Moscarini, Giuseppe and Moscarini, Giuseppe, Morale Hazard (May 2003). Cowles Foundation Discussion Paper No. 1422, Available at SSRN: https://ssrn.com/abstract=415500

Hanming Fang (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Giuseppe Moscarini

Cowles Foundation for Research in Economics ( email )

Box 208281
New Haven, CT 06520-8281
United States

HOME PAGE: http://economics.yale.edu/people/giuseppe-moscarini

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States
203-432-3596 (Phone)

HOME PAGE: http://www.econ.yale.edu/~mosca/mosca.html

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