Efficiency Wages with Motivated Agents

69 Pages Posted: 13 Aug 2020

Multiple version iconThere are 2 versions of this paper

Date Written: 2020

Abstract

Many jobs are connected to a prosocial mission, i.e., they have a positive impact on society beyond profit-maximization. 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. However, the presence of a social mission (in the form of a positive externality generated by the agent’s effort), by increasing principals’ trust in the agents’ effort responses, acts as a debiasing mechanism and thereby increases efficiency substantially.

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 or http://dx.doi.org/10.2139/ssrn.3671260

Jesper Armouti-Hansen

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Lea Cassar (Contact Author)

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Anna Deréky

ETH Zürich ( email )

Zürichbergstrasse 18
8092 Zurich, CH-1015
Switzerland

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