DP15723 Efficiency Wages with Motivated Agents
|Author(s):||Jesper Armouti-Hansen, Lea Cassar, Anna Dereky|
|Publication Date:||January 2021|
|Date Revised:||January 2021|
|Keyword(s):||Biased Beliefs, efficiency wages, Gift exchange, mission motivation|
|Programme Areas:||Labour Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=15723|
Many organizations nowadays combine profits with a social mission. This paper reveals a new hidden benefit of the mission: its role in facilitating the emergence of efficiency wages. We show that in a standard gift exchange principals highly underestimate agents' reciprocity and thereby offer wages that are much lower than the profit-maximizing level. This bias has a high social cost: if principals had correct beliefs and thus offered the profit-maximizing wage, efficiency would increase by 86 percent. However, the presence of a social mission (in the form of a positive externality generated by the agent's effort), by increasing principals' trust, acts as a debiasing mechanism. Thereby efficiency is increased by 50 percent. These results contribute to our understanding of behavior in mission-oriented organizations and to the debate about the relevance of reciprocity in the workplace and open new questions about belief formation in prosocial contexts.