Optimal contracts based on subjective performance evaluations and reciprocity

TY - JOUR

T1 - Optimal contracts based on subjective performance evaluations and reciprocity

AU - Sebald, Alexander Christopher

AU - Walzl, Markus

N1 - JEL classification: D01, D02, D82, D86, J41

PY - 2015/4/1

Y1 - 2015/4/1

N2 - As demonstrated in a recent laboratory experiment (see Sebald & Walzl, 2014), individuals tend to sanction others who subjectively evaluate their performance whenever this assessment falls short of the individuals’ self-evaluation. Interestingly, this is the case even if the individuals’ earnings are unaffected by the subjective performance appraisal. Hence, performance feedback which falls short of agents’ self- evaluations can be interpreted as an unkind act that triggers a negatively reciprocal response not only if the assessment determines agents’ earnings but also when it lacks monetary consequences. We propose a principal-agent model formalizing that agents might engage into conflict in response to ego-threatening performance appraisals and show that these conflicts stabilize principal-agent relationships based on subjective performance evaluations. In particular, we identify conditions for a positive welfare effect of increasing costs of conflict and a negative welfare effect of more capable agents.

AB - As demonstrated in a recent laboratory experiment (see Sebald & Walzl, 2014), individuals tend to sanction others who subjectively evaluate their performance whenever this assessment falls short of the individuals’ self-evaluation. Interestingly, this is the case even if the individuals’ earnings are unaffected by the subjective performance appraisal. Hence, performance feedback which falls short of agents’ self- evaluations can be interpreted as an unkind act that triggers a negatively reciprocal response not only if the assessment determines agents’ earnings but also when it lacks monetary consequences. We propose a principal-agent model formalizing that agents might engage into conflict in response to ego-threatening performance appraisals and show that these conflicts stabilize principal-agent relationships based on subjective performance evaluations. In particular, we identify conditions for a positive welfare effect of increasing costs of conflict and a negative welfare effect of more capable agents.

KW - Faculty of Social Sciences

KW - Contracts

KW - Subjective evaluations

KW - Self-esteem

KW - Ego-threats

KW - Reciprocity

U2 - 10.1016/j.joep.2015.01.004

DO - 10.1016/j.joep.2015.01.004

M3 - Journal article

SN - 0167-4870

VL - 47

SP - 62

EP - 76

JO - Journal of Economic Psychology

JF - Journal of Economic Psychology

ER -