Document Type
Discussion Paper
Publication Date
5-1-2003
CFDP Number
1422
CFDP Pages
36
Abstract
We interpret workers’ confidence in their own skills as their morale, and investigate the implication of worker overconfidence on the firm’s optimal wage-setting policies. In our model, wage contracts both provide incentives and affect worker morale, by revealing private information of the firm about worker skills. We provide conditions for the non-differentiation wage policy to be profit-maximizing. In numerical examples, worker overconfidence is a necessary condition for the firm to prefer no wage differentiation, so as to preserve some workers’ morale; the non-differentiation wage policy itself breeds more worker overconfidence; finally, wage compression is more likely when aggregate productivity is low.
Recommended Citation
Fang, Hanming and Moscarini, Giuseppe, "Moral Hazard" (2003). Cowles Foundation Discussion Papers. 1692.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/1692