Reputational Damage and Reassignment Pay

25 Pages Posted: 8 Feb 2023 Last revised: 10 Mar 2023

See all articles by Anthony M. Marino

Anthony M. Marino

University of Southern California - Marshall School of Business

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

Suggested Citation

Marino, Anthony M., Reputational Damage and Reassignment Pay (February 6, 2023). Available at SSRN: https://ssrn.com/abstract=4350372 or http://dx.doi.org/10.2139/ssrn.4350372

Anthony M. Marino (Contact Author)

University of Southern California - Marshall School of Business ( email )

Dept. of Finance & Business Economics
Los Angeles, CA 90089
United States
213-740-6525 (Phone)
213-740-6650 (Fax)

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