The Pygmalion Effect: An Agency Model with Reference Dependent Preferences

28 Pages Posted: 8 Mar 2005

See all articles by Kohei Daido

Kohei Daido

Kwansei Gakuin University - School of Economics

Hideshi Itoh

Waseda Business School; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: February 2005

Abstract

We attempt to formulate and explain two types of self- fulfilling prophecy, called the Pygmalion effect (if a supervisor thinks her subordinates will succeed, they are more likely to succeed) and the Galatea effect (if a person thinks he will succeed, he is more likely to succeed). To this purpose, we extend a simple agency model with moral hazard and limited liability by introducing a model of reference dependent preferences (RDP) by Kszegi and Rabin (2004). We show that the agent with high expectations about his performance can be induced to choose high effort with low-powered incentives. We then show that the principal's expectation has an important role as an equilibrium selection device.

Keywords: Self-fulfilling prophecy, Pygmalion effect, Galatea effect, reference dependent preferences, agency model, moral hazard

JEL Classification: B49, D82, M12, M52, M54

Suggested Citation

Daido, Kohei and Itoh, Hideshi and Itoh, Hideshi, The Pygmalion Effect: An Agency Model with Reference Dependent Preferences (February 2005). Available at SSRN: https://ssrn.com/abstract=676281 or http://dx.doi.org/10.2139/ssrn.676281

Kohei Daido (Contact Author)

Kwansei Gakuin University - School of Economics ( email )

1-155 Uegahara Ichiban-cho Nishinomiya
662-8501 Hyogo
662-8501
Japan
+81-798-54-6204 (Phone)
+81-798-51-0944 (Fax)

Hideshi Itoh

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Waseda Business School ( email )

1-6-1 Nishi-Waseda
Shinjuku-ku
Tokyo, Tokyo 169-8050
Japan

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