DP18105 Hidden Overtime: Optimal Contracts with (Self-)Deceptive Effort Reports
Requiring extra hours to get a job done signals low skills. With unobservable effort (hours of work), image-concerned agents may prefer to underreport effort to hide low skills from the principal or themselves. We show how such “hidden overtime" can arise as a consequence of the optimal contract if the principal asks for overtime reports but has no way of ensuring that these reports are also correct. It is possible that the principal benefits from the agent's image concerns but also that the agent works inefficiently long hours. While a recording system that makes underreporting difficult can alleviate the inefficiency caused by hidden overtime, a legal obligation to install such a system is not necessary.