Jump to ContentJump to Main Navigation
Show Summary Details
More options …

The B.E. Journal of Theoretical Economics

Editor-in-Chief: Schipper, Burkhard

Ed. by Fong, Yuk-fai / Peeters, Ronald / Puzzello , Daniela / Rivas, Javier / Wenzelburger, Jan


IMPACT FACTOR 2018: 0.173
5-year IMPACT FACTOR: 0.248

CiteScore 2018: 0.24

SCImago Journal Rank (SJR) 2018: 0.163
Source Normalized Impact per Paper (SNIP) 2018: 0.186

Mathematical Citation Quotient (MCQ) 2018: 0.08

Online
ISSN
1935-1704
See all formats and pricing
More options …

Costly Rewards and Punishments

Frances Z. Xu Lee
  • Corresponding author
  • Quinlan School of Business, Loyola University of Chicago, 16 E Pearson St, Chicago, IL 60611, USA
  • Email
  • Other articles by this author:
  • De Gruyter OnlineGoogle Scholar
Published Online: 2019-09-17 | DOI: https://doi.org/10.1515/bejte-2018-0131

Abstract

To punish an agent, the principal often incurs costs. I study a principal’s least costly reward and punishment scheme for an agent whose effort the principal cannot observe. I find the principal’s cost is sometimes minimized by using both costly rewards and costly punishments because (1) the agent has an outside option, or (2) a principal without commitment ability repeatedly interacts with the agent. I also find that when an agent’s effort is better at increasing the probability of a good outcome for the principal, the agent’s payoff may decrease, because the principal replaces rewards with punishments.

Keywords: costly punishment; principal-agent; moral hazard; outside option; credibility

JEL Classification: D23; L20; D86

References

  • Baker, G., R. Gibbons, and K. J. Murphy. 1999. “Informal Authority in Organizations.” Journal of Law, Economics, and Organization 15 (1): 56–73.CrossrefGoogle Scholar

  • Burton, P., S. Phipps, and L. Curtis. 2002. “All in the Family: a Simultaneous Model of Parenting Style and Child Conduct.” American Economic Review 92 (2): 368–72.CrossrefGoogle Scholar

  • Bramhall, D. F., and E. S. Mills. 1966. “A Note on the Asymmetry Between Fees and Payments.” Water Resources Research 2 (3): 615–16.CrossrefGoogle Scholar

  • Brummelman, E., S. Thomaes, B. O. de Castro, G. Overbeek, and B. J. Bushman. 2014. “That’s Not Just Beautiful – That’s Incredibly Beautiful!” The Adverse Impact of Inflated Praise on Children With Low Self-Esteem.” Psychological science 25 (3): 728–35.Google Scholar

  • Chua, A. 2011. Battle Hymn of the Tiger Mother. London, England: Bloomsbury Publishing.Google Scholar

  • Dari-Mattiacci, G., and G. De Geest. 2010. “Carrots, Sticks, and the Multiplication Effect.” Journal of Law, Economics, and Organization 26: 365–67.CrossrefWeb of Science

  • Fong, Y. F., and J. Li. 2017. “Relational Contracts, Limited Liability, and Employment Dynamics.” Journal of Economic Theory 169: 270–93.CrossrefWeb of ScienceGoogle Scholar

  • Gans, J. 2010. Parentonomics: An Economist Dad Looks at Parenting. Cambridge, MA, USA: MIT Press.Google Scholar

  • De Geest, G., and G. Dari-Mattiacci. 2013. “The Rise of Carrots and the Decline of Sticks.” The University of Chicago Law Review 80 (1): 341–93.Google Scholar

  • Henrichson, C., J. Rinaldi, and R. Delaney. 2015. The Price of Jails: Measuring the Taxpayer Cost of Local Incarceration. New York: VERA Institute of Justice. Retrieved online at: https://www.vera.org/publications/the-price-of-jails-measuring-the-taxpayer-cost-of-local-incarceration.

  • Kamijo, Y. 2016. “Rewards versus Punishments in Additive, Weakest-link, and Best-shot Contests.” Journal of Economic Behavior and Organization 122: 17–30.CrossrefWeb of ScienceGoogle Scholar

  • Larzelere, R. E., M. Klein, W. R. Schumm, and S.A. Alibrando Jr. 1989. “Relations of Spanking and Other Parenting Characteristics to Self-esteem and Perceived Fairness of Parental Discipline.” Psychological Reports 64 (3c): 1140–42.CrossrefGoogle Scholar

  • Lazear, E. P. 1991. “Labor Economics and the Psychology of Organizations.” Journal of Economic perspectives 5 (2): 89–110.CrossrefGoogle Scholar

  • Lazear, E. P. 1995. Personnel Economics, vol. 1993. Cambridge, MA: MIT press.

  • Leshem, S., and A. Tabbach. 2015. “Solving the Volunteer’s Dilemma: The Efficiency of Rewards Versus Punishments.” American Law and Economics Review 18 (1): 1–32.Web of ScienceGoogle Scholar

  • Levin, J. 2003. “Relational Incentive Contracts.” American Economic Review 93 (3): 835–57.CrossrefGoogle Scholar

  • Li, J., and N. Matouschek. 2013. “Managing Conflicts in Relational Contracts.” American Economic Review 103 (6): 2328–51.Web of ScienceCrossrefGoogle Scholar

  • Li, J., N. Matouschek, and M. Powell. 2017. “Power Dynamics in Organizations.” American Economic Journal: Microeconomics 9 (1): 217–41.Web of ScienceGoogle Scholar

  • Nosenzo, D., T. Offerman, M. Sefton, and A. van der Veen. 2013. “Encouraging compliance: Bonuses versus fines in inspection games.” The Journal of Law, Economics, & Organization 30 (3): 623–48.Google Scholar

  • Polinsky, A. M., 1979. “Notes on the Symmetry of Taxes and Subsidies in Pollution Control.” The Canadian Journal of Economics/Revue canadienne d’Economique 12 (1): 75–83.CrossrefGoogle Scholar

  • Wittman, D. 1984. “Liability for Harm or Restitution for Benefit?” The Journal of Legal Studies 13 (1): 57–80.CrossrefGoogle Scholar

About the article

Published Online: 2019-09-17


Citation Information: The B.E. Journal of Theoretical Economics, Volume 20, Issue 1, 20180131, ISSN (Online) 1935-1704, DOI: https://doi.org/10.1515/bejte-2018-0131.

Export Citation

© 2019 Walter de Gruyter GmbH, Berlin/Boston.Get Permission

Comments (0)

Please log in or register to comment.
Log in