Team Incentives and Reference‐Dependent Preferences

32 Pages Posted: 9 Nov 2016

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: Winter 2016

Abstract

We investigate a multi‐agent moral‐hazard model where agents have expectation‐based reference‐dependent preferences à la Kőszegi and Rabin (2006, 2007). We show that even when each agent's probability of success in a project is independent, a principal may employ team incentives. 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, agents with high performance are always rewarded, whereas agents with low performance are rewarded if and only if other agents' performance is high.

Suggested Citation

Daido, Kohei and Murooka, Takeshi, Team Incentives and Reference‐Dependent Preferences (Winter 2016). Journal of Economics & Management Strategy, Vol. 25, Issue 4, pp. 958-989, 2016, Available at SSRN: https://ssrn.com/abstract=2866732 or http://dx.doi.org/10.1111/jems.12166

Kohei Daido (Contact Author)

Kwansei Gakuin University - School of Economics ( email )

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Takeshi Murooka

Osaka University

1-31 Machikaneyama-cho
Toyonaka
Osaka, 560-0043
Japan

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