Morale Hazard
37 Pages Posted: 10 Jun 2003
There are 2 versions of this paper
Morale Hazard
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: Suggested Citation