IDEAS home Printed from https://ideas.repec.org/a/eee/ecolet/v192y2020ics0165176520301312.html
   My bibliography  Save this article

Correlation neglect, incentives, and welfare

Author

Listed:
  • Klümper, Andreas
  • Kräkel, Matthias

Abstract

We modify the Holmström–Milgrom model by letting the agent neglect the correlation between performance measures. Whenever true and perceived correlation are sufficiently low, correlation neglect enhances material welfare and expected profit. Otherwise, material welfare diminishes, and the agent may benefit.

Suggested Citation

  • Klümper, Andreas & Kräkel, Matthias, 2020. "Correlation neglect, incentives, and welfare," Economics Letters, Elsevier, vol. 192(C).
    • Handle: RePEc:eee:ecolet:v:192:y:2020:i:c:s0165176520301312
    DOI: 10.1016/j.econlet.2020.109171
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165176520301312
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.econlet.2020.109171?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. de la Rosa, Leonidas Enrique, 2011. "Overconfidence and moral hazard," Games and Economic Behavior, Elsevier, vol. 73(2), pages 429-451.
    2. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    3. Benjamin Enke & Florian Zimmermann, 2019. "Correlation Neglect in Belief Formation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(1), pages 313-332.
    4. Pietro Ortoleva & Erik Snowberg, 2015. "Overconfidence in Political Behavior," American Economic Review, American Economic Association, vol. 105(2), pages 504-535, February.
    5. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-328, March.
    6. Alex Rees-Jones & Ran Shorrer & Chloe J. Tergiman, 2020. "Correlation Neglect in Student-to-School Matching," NBER Working Papers 26734, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Iossa, Elisabetta & Martimort, David, 2015. "Pessimistic information gathering," Games and Economic Behavior, Elsevier, vol. 91(C), pages 75-96.
    2. Philipp Weinschenk, 2010. "Moral Hazard and Ambiguity," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2010_39, Max Planck Institute for Research on Collective Goods.
    3. David Martimort & Flavio Menezes & Myrna Wooders & ELISABETTA IOSSA & DAVID MARTIMORT, 2015. "The Simple Microeconomics of Public-Private Partnerships," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(1), pages 4-48, February.
    4. Dietrichson, Jens, 2013. "Coordination Incentives, Performance Measurement and Resource Allocation in Public Sector Organizations," Working Papers 2013:26, Lund University, Department of Economics.
    5. Elisabetta Iossa & David Martimort, 2012. "Risk allocation and the costs and benefits of public--private partnerships," RAND Journal of Economics, RAND Corporation, vol. 43(3), pages 442-474, September.
    6. Oyer, Paul & Schaefer, Scott, 2011. "Personnel Economics: Hiring and Incentives," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 20, pages 1769-1823, Elsevier.
    7. Antonio Sánchez Soliño, 2019. "Sustainability of Public Services: Is Outsourcing the Answer?," Sustainability, MDPI, vol. 11(24), pages 1-12, December.
    8. Inés Macho-Stadler & David Pérez-Castrillo, 2018. "Moral hazard: Base models and two extensions," Chapters, in: Luis C. Corchón & Marco A. Marini (ed.), Handbook of Game Theory and Industrial Organization, Volume I, chapter 16, pages 453-485, Edward Elgar Publishing.
    9. Michael T. Rauh & Giulio Seccia, 2010. "Agency and Anxiety," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(1), pages 87-116, March.
      • Michael T. Rauh & Giulio Seccia, 2006. "Agency and Anxiety," Working Papers 2006-02, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    10. Fuhai Hong & Dong Zhang, 2023. "Bureaucratic beliefs and law enforcement," Public Choice, Springer, vol. 196(3), pages 357-379, September.
    11. Araujo, Aloisio & Moreira, Humberto & Tsuchida, Marcos, 2007. "The Trade-Off Between Incentives and Endogenous Risk," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 27(2), November.
    12. Donze, Jocelyn & Gunnes, Trude, 2018. "Becoming “We” instead of “I”, identity management and incentives in the workplace," Journal of Economic Behavior & Organization, Elsevier, vol. 148(C), pages 105-120.
    13. Nicola Lacetera, 2003. "Incentives and spillovers in R&D activities: an agency-theoretic analysis of industry-university relations," Microeconomics 0312004, University Library of Munich, Germany.
    14. Meyer, Margaret A. & Olsen, Trond E. & Torsvik, Gaute, 1996. "Limited intertemporal commitment and job design," Journal of Economic Behavior & Organization, Elsevier, vol. 31(3), pages 401-417, December.
    15. Issouf Soumaré, 2013. "Incentives and Voluntary Investment in Employer Shares," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 42(1), pages 1-17, February.
    16. Xueguo Xu & Tingting Xu & Meizeng Gui, 2020. "Incentive Mechanism for Municipal Solid Waste Disposal PPP Projects in China," Sustainability, MDPI, vol. 12(18), pages 1-16, September.
    17. Mathias Dewatripont & Patrick Legros, 2005. "Public-private partnerships: contract design and risk transfer," ULB Institutional Repository 2013/175947, ULB -- Universite Libre de Bruxelles.
    18. Sloof, Randolph & van Praag, C. Mirjam, 2008. "Performance measurement, expectancy and agency theory: An experimental study," Journal of Economic Behavior & Organization, Elsevier, vol. 67(3-4), pages 794-809, September.
    19. Max Zongyuan Shang & Ken McEwan, 2021. "The make‐or‐buy decision of feed on livestock farms: Evidence from Ontario swine farms," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 69(3), pages 353-368, September.
    20. Cheng, Ing-Haw & Hsiaw, Alice, 2022. "Distrust in experts and the origins of disagreement," Journal of Economic Theory, Elsevier, vol. 200(C).

    More about this item

    Keywords

    Behavioral contract theory; Moral hazard; Risk aversion;
    All these keywords.

    JEL classification:

    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D9 - Microeconomics - - Micro-Based Behavioral Economics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecolet:v:192:y:2020:i:c:s0165176520301312. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ecolet .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.