Friends or Foes? Optimal Incentives for Reciprocal Agents

Location
University House - Room 204
Dates
Thursday 28th January 2016 (12:00-13:00)
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Speaker: Dr. Luca Livio (Solvay Brussels School of Economics & Management)

Abstract

Widely used performance-based contracts put (positive or negative) externalities on co-workers. These externalities have been proven to shape an organization’s working climate, especially when workers exhibit social preferences. However, it is a priori unclear whether a more friendly or a more competitive working environment should be encouraged. In this paper we consider a theoretical model in which a self-interested principal has to motivate a team of agents. Agents are symmetric, potentially risk-averse and exhibit reciprocity concerns towards each other. The optimal contract is derived solving a psychological game with asymmetric information. We show that the optimal incentive design depends on the interplay between the agents’ attitudes towards risks and their preferences for reciprocity. In particular, the optimal contract implements (i) a relative performance compensation scheme which induces negative reciprocity if agents are relatively little risk averse and (ii) a joint performance compensation scheme which induces positive reciprocity if agents are sufficiently risk averse. This interplay is moderated by the precision of the individual performance indicators and by the relative weights attached to positive and negative reciprocity. Our findings can explain some puzzling empirical results.

Speaker biography

Luca is a PhD candidate in Economics at ECARES, Université libre de Bruxelles (ULB), under the supervision of Georg Kirchsteiger. Luca's main fields of research are Behavioural Economics, Contract Theory, Managerial and Organizational Economics. Some of his projects extends to Financial Economics, Household Economics, Labour Economics and Regulation. In July 2012 Luca has been awarded a 4 years research grant by the Belgian Scientific Research Fund (FRS-FNRS). He holds a MSc (research track) in Economics and Statistics from the Université libre de Bruxelles, and a BSc and a MSc in Economics and Social Sciences from Bicocca University of Milan.