Endogenous Effort Norms in Hierarchical Firms

__Abstract__ This paper studies how a three-layer hierarchical firm (principal-supervisor-agent) optimally creates effort norms for its employees. The key assumption is that effort norms are affected by the example of superiors. In equilibrium, norms are eroded as one moves down the hierarchy. The reason is that, because exerting effort is costly, the supervisor only partially complies with the principal's example, and thereby transmits a lower norm to the agent. The principal optimally responds to norm erosion by setting a higher example to begin with. In equilibrium, norm erosion gives rise to three inefficiencies: the principal works too hard, the supervisor's norm is too high, and the agent's norm is too low. To reduce these inefficiencies, firms should keep the extent of hierarchy to a minimum, promote employees with the strongest sensitivity to social norms, and distort man agerial spans of control

Altruism and Relational Incentives in the Workplace

This paper studies how altruism between managers and employees affects relational incentive contracts. To this end we develop a simple dynamic principal-agent model where both players may have feelings of altruism or spite toward each other. The con- tract may contain two types of incentives for the agent to work hard: a bonus and a threat of dismissal. We find that altruism undermines the credibility of a threat of dis- missal but strengthens the credibility of a bonus. Among others, these two mechanisms imply that higher altruism sometimes leads to higher bonuses, while lower altruism may increase productivity and players utility in equilibrium

Social Relations and Relational Incentives

This paper studies how social relationships between managers and employees affect relational incentive contracts. To this end we develop a simple dynamic principal-agent model where both players may have feelings of altruism or spite toward each other. The contract may contain two types of incentives for the agent to work hard: a bonus and a threat of dismissal. We find that good social relationships undermine the credibility of a threat of dismissal but strengthen the credibility of a bonus. Among others, these two mechanisms imply that better social relationships sometimes lead to higher bonuses, while worse social relationships may increase productivity and players' utility in equilibrium

Altruism, Conformism, and Incentives in the Workplace

Performance pay can motivate employees, but money is not the only motivation in the workplace. Altruism, which means that someone enjoys the well-being of someone else, can also provide a powerful motivation. The first part of this thesis studies theoretically how altruism between an employee and his superior affects the optimal use of monetary incentives. Among others, the analysis reveals how altruism influences the credibility of monetary incentive schemes, and how altruistic managers can be prevented from being lenient in evaluating employee performance. The second part of this thesis focuses on motivation stemming from the desire to conform to social norms. I develop a theoretical model in which it is assumed that norms for employees are affected by the example of superiors. The analysis sheds light on how superiors take the norm-setting aspect of their behavior into account, and derives implications for the optimal design of organizations

Social Relations and Relational Incentives

This paper studies how social relationships between managers and employees affect relational incentive contracts. To this end we develop a simple dynamic principal-agent model where both players may have feelings of altruism or spite toward each other. The contract may contain two types of incentives for the agent to work hard: a bonus and a threat of dismissal. We find that good social relationships undermine the credibility of a threat of dismissal but strengthen the credibility of a bonus. Among others, these two mechanisms imply that better social relationships sometimes lead to higher bonuses, while worse social relationships may increase productivity and players' utility in equilibrium