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The Pygmalion and Galatea Effects: An Agency Model with Reference-Dependent Preferences and Applications to Self-Fulfilling Prophecy

Author

Listed:
  • Kohei Daido

    (School of Economics, Kwansei Gakuin University)

  • Hideshi Itoh

    (Graduate School of Commerce and Management, Hitotsubashi University)

Abstract

We attempt to formulate and explain two types of self-fulfilling prophecy, called the Pygmalion effect (if a supervisor thinks her subordinates will succeed, they are more likely to succeed) and the Galatea effect (if a person thinks he will succeed, he is more likely to succeed). To this purpose, we extend a simple agency model with moral hazard and limited liability by introducing a model of reference-dependent preferences (RDP) by K˝oszegi and Rabin (2004). We show that the agent with high expectations about his performance can be induced to choose high effort with low-powered incentives. We then argue that the principal’s expectation has an important role as an equilibrium selection device.

Suggested Citation

  • Kohei Daido & Hideshi Itoh, 2007. "The Pygmalion and Galatea Effects: An Agency Model with Reference-Dependent Preferences and Applications to Self-Fulfilling Prophecy," Discussion Paper Series 35, School of Economics, Kwansei Gakuin University, revised Sep 2007.
    • Handle: RePEc:kgu:wpaper:35
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    References listed on IDEAS

    as
    1. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1133-1165.
    2. Hermalin, Benjamin E, 1998. "Toward an Economic Theory of Leadership: Leading by Example," American Economic Review, American Economic Association, vol. 88(5), pages 1188-1206, December.
    3. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    4. Armin Falk & Markus Knell, 2004. "Choosing the Joneses: Endogenous Goals and Reference Standards," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(3), pages 417-435, October.
    5. Roland Bénabou & Jean Tirole, 2003. "Intrinsic and Extrinsic Motivation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(3), pages 489-520.
    6. Sugden, Robert, 2003. "Reference-dependent subjective expected utility," Journal of Economic Theory, Elsevier, vol. 111(2), pages 172-191, August.
    7. Munro, Alistair & Sugden, Robert, 2003. "On the theory of reference-dependent preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 50(4), pages 407-428, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The Galatea Effect:The Power of Self-expectations
      by Miguel in Simoleon Sense on 2009-12-15 07:57:14

    Citations

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    Cited by:

    1. Fabian Herweg & Daniel Muller & Philipp Weinschenk, 2010. "Binary Payment Schemes: Moral Hazard and Loss Aversion," American Economic Review, American Economic Association, vol. 100(5), pages 2451-2477, December.
    2. Kohei Daido & Takeshi Murooka, 2013. "Loss Aversion, Stochastic Compensation, and Team Incentives," Discussion Paper Series 107, School of Economics, Kwansei Gakuin University, revised Jul 2013.
    3. Balmaceda, Felipe, 2018. "Optimal task assignments with loss-averse agents," European Economic Review, Elsevier, vol. 105(C), pages 1-26.
    4. Kohei Daido & Takeshi Murooka, 2016. "Team Incentives and Reference‐Dependent Preferences," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 25(4), pages 958-989, December.
    5. Andrea Repetto & Alejandro Jofré & Sofía Moroni, 2012. "Dynamic Contracts Under Loss Aversion," Working Papers wp_024, Adolfo Ibáñez University, School of Government.
    6. Marchegiani, Lucia & Reggiani, Tommaso & Rizzolli, Matteo, 2016. "Loss averse agents and lenient supervisors in performance appraisal," Journal of Economic Behavior & Organization, Elsevier, vol. 131(PA), pages 183-197.
    7. Gómez-Miñambres, Joaquín, 2012. "Motivation through goal setting," Journal of Economic Psychology, Elsevier, vol. 33(6), pages 1223-1239.
    8. Gómez Miñambres, Joaquín, 2011. "Make it challenging : motivation through goal setting," UC3M Working papers. Economics we1123, Universidad Carlos III de Madrid. Departamento de Economía.
    9. Dato, Simon & Müller, Daniel & Grunewald, Andreas, 2015. "Expectation-Based Loss Aversion and Strategic Interaction," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112947, Verein für Socialpolitik / German Economic Association.
    10. Herweg, Fabian & Müller, Daniel, 2008. "The Optimality of Simple Contracts: Moral Hazard and Loss Aversion," Bonn Econ Discussion Papers 17/2008, University of Bonn, Bonn Graduate School of Economics (BGSE).
    11. Daido, Kohei & Morita, Kimiyuki & Murooka, Takeshi & Ogawa, Hiromasa, 2013. "Task assignment under agent loss aversion," Economics Letters, Elsevier, vol. 121(1), pages 35-38.
    12. Dato, Simon & Grunewald, Andreas & Müller, Daniel, 2015. "Expectation-Based Loss Aversion and Strategic Interaction," Bonn Econ Discussion Papers 02/2015, University of Bonn, Bonn Graduate School of Economics (BGSE).

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    More about this item

    Keywords

    Self-fulfilling prophecy; Pygmalion effect; Galatea effect; referencedependent preferences; agency model; moral hazard;
    All these keywords.

    JEL classification:

    • B49 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Other
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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