Anton Suvorov

Discretionary rewards as a feedback mechanism

This paper studies the use of discretionary rewards in a finitely repeated principal-agent relationship with moral hazard. The key aspect is that rewards have informational content. When the principal obtains a private subjective signal about the agents performance, she may pay discretionary bonuses to provide credible feedback to the agent. In accordance with the often observed compression of ratings, we show that in equilibrium the principal communicates the agents interim performance imperfectly, i.e., she does not fully differentiate good and bad performance. Furthermore, we show that small rewards can have a large impact on the agents effort, provided that the principals stake in the project is small.

Goal Setting as a Self-Regulation Mechanism

We develop a theory of self-regulation based on goal setting for an agent with present-biased preferences. Preferences are assumed to be reference-dependent and exhibit loss aversion, as in prospect theory. The reference point is determined endogenously as an optimal self-sustaining goal. The interaction between hyperbolic discounting and loss aversion makes goals a credible and effective instrument for self-regulation. This is an entirely internal commitment device that does not rely on reputation building. We show that in some cases it is optimal to engage in indulgent behavior, and sometimes it is optimal to set seemingly dysfunctional goals. Finally, we derive a condition under which proximal (short term) goals are better than distal (long term) goals. Our results provide an implicit evolutionary rationale for the existence of loss aversion as a means of self-control.

Bad News: An Experimental Study on the Informational Effects Of Rewards

Psychologists and economists have argued that rewards often have hidden costs. One possible reason is that the principal may have incentives to offer higher rewards when she knows the task is difficult. Our experiment tests if high rewards embody such bad news and if this is correctly perceived by their recipients. Our design allows us to decompose the overall effect of rewards on effort into a direct incentive and an informational effect. The results show that participants correctly interpret high rewards as bad news. In accordance with theory, the negative informational effect coexists with the direct positive effect.

Discretionary Acquisition of Firm-Specific Human Capital under Non-verifiable Performance

In this paper we develop a model of discretionary employee investment in firm-specific human capital. When a firm has full bargaining power, the non-contractibility of this investment completely undermines the employee’s incentives. However, the incumbent firm’s inability to observe competing wage offers at the interim stage prevents it from completely expropriating the surplus, thereby creating incentives for the employee to invest. We demonstrate that commitment to a wage floor for the second period destroys the worker’s incentives to acquire human capital, but makes turnover efficient. Therefore, such a commitment has value only if the return on the employee’s deliberate investment in human capital acquisition is sufficiently low. When firms are privately informed about the productivity of their human capital acquisition technology, more productive firms offer higher entry wages to separate themselves from less productive firms. Furthermore, in contrast to the case of symmetric information about human capital acquisition technology, the commitment opportunity now has value for firms with higher return on investment: commitment to a wage floor acts as a substitute for raising the entry wage.

Advice by an Informed Intermediary: Can You Trust Your Broker?

The paper investigates the credibility of an intermediarys advice in a bilateral trade model. A seller and a buyer with private and independent valuations exchange a unit of good. Trade is mediated by an intermediary, who observes a coarse signal about the buyers valuation and may reveal it to the seller before bargaining. We show that if the broker gets a fixed per-transaction fee, he can fully transmit information via cheap talk. This information transmission increases ex ante welfare of the seller and the broker but has an ambiguous impact on the buyer. We show that limits to informative communication may arise if the intermediary observes signals about valuations of both participants or because of competition between intermediaries. Finally, using mechanism design approach, we show that choosing an appropriate system of two-part tariffs allows the intermediary to secure the same expected profit as in the optimal direct mechanism.