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Title: Essays in behavioural contract theory
Author: Upton, H.
ISNI:       0000 0004 7964 2208
Awarding Body: University of Liverpool
Current Institution: University of Liverpool
Date of Award: 2019
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This thesis investigates the optimal provision of incentives when employment relationships are characterised by moral hazard and individuals have relative income concerns. In contrast to the existing literature, it is assumed that workers' social comparisons are not limited to others within the firm, but extend to larger groups in society. The thesis is organised into three chapters. The first chapter provides a comprehensive survey of the literatures which study incentive contracting when parties' preferences are characterised by the related concepts of inequity aversion or loss aversion. The chapter discusses the similarities between the two literatures, highlights some results which are relevant for both preference specifications and establishes the context in which the subsequent analysis should be placed. The second chapter examines a firm's optimal choice of contract for a worker whose preferences exhibit relative income concerns. This is formalised through use of a stylised model, in which workers have an aversion to falling behind the economy's average income. In this framework, it is shown that the optimal contract takes either a binary or ternary form and that firms benefit from the social comparisons of workers. In addition, there is an interdependence between the contracting of firm-worker pairs which results in an externality effect, so that firms could gain from collective decision making. Moreover, relative income concerns imply a lower economy-wide average wage, as well as a reduced level of inequality as measured by the Gini coefficient. The third chapter extends the foregoing analysis to an environment featuring a frictional labour market and unemployment; this allows for an investigation into how dismissal can be used by firms to create effort incentives. Dismissing workers for poor performance is shown to act as a substitute for explicit incentive pay, allowing firms to reduce wage costs. Some implications for labour market policies are derived. Increases in the minimum wage are found to aid the creation of incentives, lowering the bonus payment necessary to implement effort. In contrast, increases in unemployment benefits have a negative impact on incentives. These effects are shown to be stronger and more pronounced when workers have relative income concerns. Overall, the thesis provides several predictions and insights aimed at improving the understanding of incentive contracts, their structure and their effects on individual behaviour.
Supervisor: Demougin, D. M. ; Bach, C. W. Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral