GUILTY CONSCIENCE AND INCENTIVES WITH PERFORMANCE ASSESSMENT ERRORS

Abstract

This study examines the effects of guilty conscience on incentive in the situation where an agent performance assessment has errors. There are two types of assessment error: undervaluation and overvaluation. In overvaluation, agents will not correct the assessment because their wages would then decrease. Although agents will want their undervaluation corrected, principals will not correct the error due to increased wage cost. Hence, correcting errors is complicated. However, this type of selfish behavior by agents and principals produces feelings of guilt, particularly when others trust them. In this situation, a high incentive is desirable for conscientious people with a strong sense of guilt or for nonconscientious people who do not feel guilt, but it is undesirable for intermediate‐type people who are conscientious only to a certain extent. (JEL D03, D82, J41)