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Positive Self‐image and Incentives in Organisations

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  • Luís Santos‐Pinto

Abstract

This paper investigates the implications of workers’ mistaken beliefs about their abilities on incentives in organisations. It shows that if effort is observable, then an agent's mistaken beliefs about his own ability are favourable to the principal. However, when effort is unobservable an agent's mistaken beliefs about his own ability can be either favourable or unfavourable to the principal. The article provides conditions under which an agent's overestimation about his own ability is favourable to the principal when effort is unobservable. The article shows that workers’ mistaken beliefs about their co‐workers’ abilities make interdependent incentive schemes more attractive to firms than individualistic ones.

Suggested Citation

  • Luís Santos‐Pinto, 2008. "Positive Self‐image and Incentives in Organisations," Economic Journal, Royal Economic Society, vol. 118(531), pages 1315-1332, August.
    • Handle: RePEc:wly:econjl:v:118:y:2008:i:531:p:1315-1332
    DOI: 10.1111/j.1468-0297.2008.02171.x
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines

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