Present-biased preferences,self-awareness and shirking |
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| Institution: | 1. School of Mathematics and Computer Science, Changsha University of Science and Technology, Changsha, Hunan 410114, PR China;2. College of Mathematics and Econometrics, Hunan University, Changsha, Hunan 410082, PR China;3. College of Science, Central South University of Forestry and Technology, Changsha, Hunan 410004, PR China;1. University of Bonn, Department of Economics, Adenauerallee 24-42, D-53113 Bonn, Germany;2. Victoria University of Wellington, School of Economics and Finance, 23 Lambton Quay (Pipitea Campus), Wellington, New Zealand;3. Karlsruhe Institute of Technology, Institute of Management, Chair of Human Resource Management, Kaiserstr. 89, 76133 Karlsruhe, Germany;1. University of Cape Town, South Africa;2. MRC/Wits University Rural Public Health and Health Transitions Research Unit (Agincourt), School of Public Health, Faculty of Health Sciences, University of the Witwatersrand, South Africa;3. INDEPTH Network, Ghana;4. DST/SAMRC South African Population Research Infrastructure Network (SAPRIN);1. Paris School of Economics (PSE) - University Paris 1 Panthéon-Sorbonne, PjSE, 48 bd Jourdan, 75014 Paris, France;2. Economie Publique, INRA, AgroParisTech, Université Paris-Saclay, 78850 Thiverval-Grignon, France;3. MRE, Univ. Montpellier, Montpellier, France;4. CEE-M, Univ. Montpellier, CNRS, INRA, SupAgro, Univ. Paul Valéry Montpellier 3, Montpellier, France;1. Questrom School of Business, Boston University, Boston, MA, United States of America;2. National Bureau of Economic Research, Cambridge, MA, United States of America;3. Department of Economics, Harvard University, Littauer Center, Cambridge, MA, United States of America |
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| Abstract: | We model a mechanism design problem in which the principal owns a project that requires work effort by an agent, but agents may have time-inconsistent, present-biased preferences and lack complete self-awareness of these preferences. The self-control problem and naïveté of an agent may lead him to agree to a contract but later shirk or slack-off, even though doing so is observable. When the principal cannot severely punish shirking and agents are completely naïve, the second-best solution entails allowing a present-biased agent to slack-off in order to avoid a greater loss due to shirking. With greater self-awareness among present-biased agents, the principal may do better by screening some from accepting the contract. Furthermore, when shirking can be severely punished, this does not lead to contracts that eliminate effects of the self control problem. Instead the principal may exploit present-biased agents by offering a contract that allows them to slack-off (which agents fail to foresee they will choose to do) but at the expense of foregoing much compensation. |
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