Psychology at work

We compare three wage–effort psychological games. In the first game, the agent’s motivation hinges on a degree of altruism influenced by the surprise generated by the principal’s wage offer. The agent works harder when the wage is greater than expected and vice versa when the wage is smaller than expected. Consistent equilibrium beliefs oblige the principal to randomize in order to surprise the agent, which results in the principal being worse off than if she were dealing with an unemotional agent. We then consider an intention-based reciprocity model and a model of guilt aversion. We find that guilt aversion may potentially yield the best outcome for the principal.