Income Inequality and Incentives in Economies with Other-regarding Preferences

Jenny Kragl (EBS University of Business and Law)
Benjamin Bental (University of Haifa)

Abstract : We analyze model economies populated by individuals who care about their own income and wealth but also regard their position relative to the economy's average values of these variables. Furthermore, these individuals differ in their initial wealth. We consider inequality averse and competitive populations. Poor individuals are inferiority averse in both cases while rich individuals are superiority averse in the former but superiority seeking in the latter case. We investigate the impact of such preferences and wealth inequality on incentive contracts, output, and welfare. Unlike former agency models with inequality aversion within firms, we find that increasing inferiority aversion at the societal level tends to raise equilibrium effort and reduce wage costs. The same holds also for superiority seeking workers. By contrast, raising superiority aversion lowers effort and increases wage costs. A parameterized version of the model which roughly mimics some key features of the industrialized world shows that, even under inequality aversion, increased initial wealth differences lead to higher average output, entail distributional utility losses, and result in a more uneven income distribution.

Subjective Evaluation: the Role of (institutionalized) Conflict for Motivation

W. Bentely MacLeod (Columbia University)
Victoria Valle Lara (University of Lausanne)
Christian Zehnder (University of Lausanne)

Abstract : In the management literature the need to reduce organizational conflict is a frequent topic. Economists, in contrast, have argued that functional employment relationships require a certain level of conflict, because a healthy conflict culture helps to overcome incentive problems caused by incomplete contracts and asymmetric information. In this paper we use a laboratory experiment to explore the role of conflicts in a principal-agent setup with subjective performance evaluation. We provide empirical evidence that conflicts can indeed be efficiency-enhancing even in complex environments. At the same time, however, our study also demonstrates that establishing a conflict culture is a delicate matter. If conflicts are encouraged in a careless, hands-off manner, the destructive side of conflicts is likely to dominate. A functioning conflict culture requires a careful management of norms. In our experiment we find that conflicts have positive net effects only if an explicit code of conduct is established and conflicts are institutionalized through a grievance process.

Self-managing Terror

Peter Schram (Vanderbilt University)

Abstract : I examine a principal-agents model of subversion with externalities and identify a novel explanation for how diversity can be valuable to organizations: teams of diverse agents will at times self-manage their agency problems. Generally, this model explores how and when integrating fringe or ideologically extreme agents can align incentives between the principal and teams of agents. This technique is shown to function better relative to other contracting techniques in settings that are bureaucratic and low-information. Self-managing teams are explored in the context of Islamist terror groups that use foreign fighters. Because foreign and domestic fighters have conflicting preferences over what types of activities the group should be conducting, if foreign and domestic are integrated onto a team, then the team may self-regulate with efficiency gains for the principal. This model explains variation in agency problems and foreign fighter usage in major insurgent groups, including al Qaeda in Iraq, the Haqqani Network, and the Islamic State.