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
JEL(s): D23, M52
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.