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Other-Regarding Preferences in Organizational Hierarchies

Author

Listed:
  • Kemal Saygili

    (Department of Economics, Middle East Technical University, Ankara, Turkey)

  • Serkan Kucuksenel

    (Department of Economics, Middle East Technical University, Ankara, Turkey)

Abstract
In this paper, we provide new theoretical insights about the role of collusion in organizational hierarchies by combining the standard principal-supervisor-agent framework with a theory of social preferences. Extending Tirole’s (1986) model of hierarchy with the inclusion of Fehr and Schmidt’s (1999) distributional other-regarding preferences approach, the links between inequity aversion, collusive behavior throughout the levels of a hierarchy and the changes in optimal contracts are studied. It turns out that other-regarding preferences do change the collusive behavior among parties depending on the nature of both the agent’s and the supervisor’s other-regarding preferences. Most prominent impact is on the optimal effort levels. When the agent is inequity averse principal can exploit this fact to make agent exert higher effort level than she would otherwise. In order to satisfy the participation constraint of the supervisor, the effort level induced for the agent becomes lower when the supervisor is status seeker, and it is higher when the supervisor is inequity averse.

Suggested Citation

  • Kemal Saygili & Serkan Kucuksenel, 2018. "Other-Regarding Preferences in Organizational Hierarchies," ERC Working Papers 1802, ERC - Economic Research Center, Middle East Technical University, revised Feb 2018.
    • Handle: RePEc:met:wpaper:1802
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    File URL: http://erc.metu.edu.tr/en/system/files/menu/series18/1802.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Stefano Dughera & Alain Marciano, 2022. "Supervise me if you can. Relational feelings, incentive pays and supervisory violations," Journal of Economics, Springer, vol. 136(1), pages 47-72, June.

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    More about this item

    Keywords

    Other-Regarding Preferences; Hierarchy; Collusive Behavior; Optimal Contract Design;
    All these keywords.

    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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