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Hidden Overtime: Optimal Contracts with (Self-)Deceptive Effort Reports

Author

Listed:
  • Alasalmi, Juho
  • Goldlücke, Susanne
  • Jordan, Michelle

Abstract

Requiring extra hours to get a job done signals low skills. With unobservable effort (hours of work), image-concerned agents may prefer to underreport effort to hide low skills from the principal or themselves. We show how such “hidden overtime" can arise as a consequence of the optimal contract if the principal asks for overtime reports but has no way of ensuring that these reports are also correct. It is possible that the principal benefits from the agent's image concerns but also that the agent works inefficiently long hours. While a recording system that makes underreporting difficult can alleviate the inefficiency caused by hidden overtime, a legal obligation to install such a system is not necessary.

Suggested Citation

  • Alasalmi, Juho & Goldlücke, Susanne & Jordan, Michelle, 2023. "Hidden Overtime: Optimal Contracts with (Self-)Deceptive Effort Reports," CEPR Discussion Papers 18105, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18105
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    More about this item

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law

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