Monetizing virtuous employees

Abstract

This study addresses contracting with an employee (labeled a saint) whose distaste for profit-seeking effort can be mitigated by engaging in another effort directed toward the realization of broader societal goals (i.e., sustainability). The saint is also optimistic about the efficacy of this effort. I establish conditions under which the principal maximizes expected profits by hiring a saint instead of a traditional agent. This can occur even if sustainability initiatives, not including the effect on compensation, generate negative cash flows. I extend the model to include a sustainability report used in a second period for recontracting purposes, and find that the principal can prefer an uninformative report because it may allow her to continue to extract the saint's private benefits from sustainability actions.