Séminaire

The Equilibrium Value of Employee Ethics

Simon Gervais (Duke University)

13 mars 2017, 12h30–14h00

Salle MF 323

Fédération des Banques Françaises Seminar

Résumé

We propose a model in which employees differ in both skills and ethics. Employees receive a private, non-verifiable signal about the quality of their projects, and decide whether or not to undertake the project. Ethical employees internalize the overall costs and benefits of a project, whereas strategic employees make their decision based solely on personal rewards (i.e., future wages), and skilled agents are more likely to have projects that succeed. Hence, both ethics and skills are valuable to firms, which is reflected in how employee wages vary with firms’ beliefs about an employee’s type given his history. We characterize equilibrium employee decisions and wages, and derive comparative statics. The presence (and value) of ethics among some employees disciplines the behavior of strategic ones to make decisions more aligned with overall value. Hence, this market mechanism acts as at least a partial substitute for more interventionist solutions to the incentive-alignment problem, such as costly monitoring. We conclude by introducing task heterogeneity, wherein value is created by correctly sorting employees into tasks according to their type, and investigating the extent to which this sorting is efficiently accomplished in equilibrium.(Joint with Brendan Daley)