Is the Efficiency Wage Efficient? The Social Norm and Organizational Corruption

Abstract:     
The effectiveness of efficiency wage incentives is often jeopardized by perverse organizational corruption. We model organizational corruption as a phenomenon of social interaction and relate the substantial psychological role characterizing the social norm to the corruption problem. We find that if the status quo bribery rate within the firm is high, social norms can no longer serve as a sufficient sanction against a corrupt supervisor; pandemic organizational corruption tends to generate a critical mass effect - the snowball effect - which intensifies the corruption effect. This intensified effect, due to the snowballing character of social norms, may more than offset the usual incentive effect of wages, resulting in more widespread shirking in the firm.

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