Team Incentives and Reference-Dependent Preferences

41 Pages Posted: 6 Sep 2011 Last revised: 16 Sep 2012

See all articles by Kohei Daido

Kohei Daido

Kwansei Gakuin University - School of Economics

Takeshi Murooka

Osaka University

Multiple version iconThere are 2 versions of this paper

Date Written: September 14, 2012

Abstract

We investigate a multi-agent moral-hazard model where agents have expectation-based reference-dependent preferences a la Koszegi and Rabin (2006, 2007). We show that even when each agent's probability of success in a project is independent, team incentives can be optimal. Because the agents are loss averse, they have first-order risk aversion to wage uncertainty. This causes the agents to work harder when their own failure is stochastically compensated through other agents' performance. In the optimal contract, both high- and low-performance agents are equally rewarded if most agents accomplish their projects; otherwise only high-performance agents are rewarded.

Keywords: Moral Hazard, Team Incentives, Reference-Dependent Preferences, Loss Aversion, Performance Evaluation

JEL Classification: D86, M12, M52

Suggested Citation

Daido, Kohei and Murooka, Takeshi, Team Incentives and Reference-Dependent Preferences (September 14, 2012). Available at SSRN: https://ssrn.com/abstract=1922366 or http://dx.doi.org/10.2139/ssrn.1922366

Kohei Daido (Contact Author)

Kwansei Gakuin University - School of Economics ( email )

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Takeshi Murooka

Osaka University

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Toyonaka
Osaka, 560-0043
Japan

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