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Hidden Cost of Sanctions in a Dynamic Principal-Agent Model: Reactance to Controls and Restoration of Freedom

Author

Listed:
  • Kohei Daido

    (School of Economics, Kwansei Gakuin University)

  • Tomoya Tajika

    (Hokusei Gakuen University)

Abstract

This study examines the effect of the principal's control over the agent's behavior in a dynamic principal-agent model with hidden information. We show the condition that the agent who has a similar preference for actions as the principal dares to choose the unpreferred action when the principal imposes a sanction on such an action. This also makes the principal worse off even when imposing sanctions is materially costless. When the principal incurs a cost on sanctions, they cease implementing them after observing the unpreferred action taken by the agent. Our results of the hidden cost of control correspond to the insight from the psychological reactance theory: when an agent's freedom is threatened, they resist it to restore the freedom.

Suggested Citation

  • Kohei Daido & Tomoya Tajika, 2021. "Hidden Cost of Sanctions in a Dynamic Principal-Agent Model: Reactance to Controls and Restoration of Freedom," Discussion Paper Series 233, School of Economics, Kwansei Gakuin University.
    • Handle: RePEc:kgu:wpaper:233
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Dynamic principal-agent model; Hidden cost of controls; Psychological reactance; Ratchet effects; Sanction;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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