Efficiency Wages with Motivated Agents

63 Pages Posted: 13 Aug 2020

See all articles by Jesper Armouti-Hansen

Jesper Armouti-Hansen

affiliation not provided to SSRN

Lea Cassar

University of Cologne

Anna Deréky

affiliation not provided to SSRN

Date Written: 2020

Abstract

Many organizations nowadays combine profits with a social mission. This paper reveals a new hidden benefit of the mission: its role in facilitating the emergence of efficiency wages. We show that in a standard gift-exchange principals highly underestimate agents’ reciprocity and, thereby, offer wages that are much lower than the profit-maximizing level. This bias has a high social cost: if principals had correct beliefs and thus offered the profit-maximizing wage, efficiency would increase by 86 percent. However, the presence of a social mission (in the form of a positive externality generated by the agent’s effort), by increasing principals' trust, acts as a debiasing mechanism and, thereby, increases efficiency by 50 percent. These results contribute to our understanding of behavior in mission-oriented organizations, to the debate about the relevance of reciprocity in the workplace and open new questions about belief formation in prosocial contexts.

Keywords: mission motivation, reciprocity, gift exchange, beliefs, efficiency wages

JEL Classification: D230, M520

Suggested Citation

Armouti-Hansen, Jesper and Cassar, Lea and Deréky, Anna, Efficiency Wages with Motivated Agents (2020). CESifo Working Paper No. 8474, Available at SSRN: https://ssrn.com/abstract=3671260

Jesper Armouti-Hansen (Contact Author)

affiliation not provided to SSRN

No Address Available

Lea Cassar

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Anna Deréky

affiliation not provided to SSRN

No Address Available

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