TY - UNPB

T1 - How Ego-threats Facilitate Contracts Based on Subjective Evaluations

AU - Sebald, Alexander

AU - Walzl, Markus

N1 - JEL classification: D01, D02, D82, D86, J41

PY - 2008

Y1 - 2008

N2 - We show that individuals' desire to protect their self-esteem against ego-threatening feedback can mitigate moral hazard in environments with purely subjective performance evaluations. In line with evidence from social psychology we assume that agents' react aggressively to evaluations by the principal which do not coincide with their own positive self-perceptions and thereby generate costs of conflict for the principal. We identify conditions for a positive welfare effect of increasing costs of conflict or increasing sensitivity to ego-threats, and a negative welfare effect of a more informative information technology. As a consequence, principals may choose imperfect information technologies in equilibrium even if the signal quality is costless.

AB - We show that individuals' desire to protect their self-esteem against ego-threatening feedback can mitigate moral hazard in environments with purely subjective performance evaluations. In line with evidence from social psychology we assume that agents' react aggressively to evaluations by the principal which do not coincide with their own positive self-perceptions and thereby generate costs of conflict for the principal. We identify conditions for a positive welfare effect of increasing costs of conflict or increasing sensitivity to ego-threats, and a negative welfare effect of a more informative information technology. As a consequence, principals may choose imperfect information technologies in equilibrium even if the signal quality is costless.

KW - Faculty of Social Sciences

KW - self-esteem

KW - ego-threats

M3 - Working paper

BT - How Ego-threats Facilitate Contracts Based on Subjective Evaluations

PB - Department of Economics, University of Copenhagen

ER -