Reputational Damage and Reassignment Pay
25 Pages Posted: 8 Feb 2023 Last revised: 10 Mar 2023
Date Written: February 6, 2023
Abstract
This paper asks whether it is optimal for a firm to pay a loss averse agent for losses due to demotion and reassignment caused by a bad fit on an assignment, in a hidden action setting. We find that it is optimal for the firm to fully pay the agent for such losses with a targeted contingent payment if the degree of loss aversion is high. When the degree of loss aversion is low, no payment for loss recovery is optimally made. We characterize the optimal contract and show that profit, utility and welfare are enhanced when the firm follows this strategy.
Keywords: Reputational Damage, Reassignment Pay
JEL Classification: L2, D86
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