Morale hazard |
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Authors: | Hanming Fang Giuseppe Moscarini |
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Institution: | a Department of Economics, Yale University, New Haven, CT 06520-8264, USA b Department of Economics, Yale University, New Haven, CT 06520-8268, USA |
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Abstract: | We interpret workers’ confidence in their own skills as their morale, and investigate the implication of worker overconfidence on the firm's optimal wage-setting policies. In our model, wage contracts both provide incentives and affect worker morale, by revealing private information of the firm about worker skills. We provide conditions for the non-differentiation wage policy to be profit-maximizing. In numerical examples, worker overconfidence is a necessary condition for the firm to prefer no wage differentiation, so as to preserve some workers’ morale; the non-differentiation wage policy itself breeds more worker overconfidence; finally, wage compression is more likely when aggregate productivity is low. |
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Keywords: | J31 D82 |
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