Incorporating morale into a classical agency model: implications for incentives, effort, and organization

Abstract

This paper incorporates morale into a standard principal-agent model. When morale is observable, the worker’s effort level, the optimal piece rate, and the firm’s expected profits are all generally increasing in the worker’s level of morale. Furthermore, under reasonable conditions, higher-morale individuals are more responsive to incentives. Finally, when considering morale interdependence, conditions are derived which determine optimal organization strategies in terms of pooling or separating workers, and corresponding staffing policies are discussed.