Lecture: Betrayal Aversion and Work Performance
Public Lecture by Holger A. Rau
In this paper we study the impact of betrayal aversion on agents' effort provision, when principals have discretion regarding agents' remuneration. We show theoretically that agents who work under a nonbinding bonus contract face a trade-off in their effort choice between the likelihood and the level of betrayal. Thus, depending on which effect predominates, betrayal aversion may either undermine or underpin the effectiveness of bonus contracts to induce effort. The data of our experiment reveal that betrayal aversion hinders the effectiveness of bonus contracts. If the principal promises to pay a bonus for sufficiently high effort, the message is ineffective when agents are characterized by a high degree of betrayal aversion. In strong contrast, employees with a low degree of betrayal aversion increased their performance by more than 50% when they received this message. Our findings emphasize that psychological costs may be an important obstacle for the success of economic incentives.
Holger A. Rau is Assistant Professor of Experimental Economics at the University of Göttingen and currently a guest at IHS. For more details, see his website.
The event will be chaired by Kerstin Grosch.
Please send your registration to event(at)ihs.ac.at.