Pride and Prejudice: The Human Side of Incentive Theory

Abstract

Many people are sensitive to social esteem, and their pride is a source of pro-social behavior. We present a game-theoretic model in which sensitivity to esteem varies across players and may depend on context as well players' beliefs about their opponents. For example, the pride associated with a generous image is greater when the player holding the image is in fact generous and believes the observers to be generous as well. The model can account both for the fact that players' behavior sometimes depends on the opponents' unchosen options and for the prevalence of small symbolic gifts. Perhaps most importantly, the model offers an explanation for motivational crowding out: Control systems and pecuniary incentives may erode morale by signaling to the agent that the principal is not worth impressing. We are grateful to the Torsten and Ragnar Söderberg Foundation (Ellingsen) and the Swedish Research Council (Johannesson) for financial support. Thanks to George Baker, Kjell-Arne Brekke, Florian Englmaier, Ernst Fehr, Martin Flodén, Oliver Hart, Bengt Holmström, John Moore, Anna Sjögren, Jean-Robert Tyran, RobertÖstling, and especially Michael Kosfeld for helpful discussions. The paper has also benefited from comments by many other seminar and conference participants. Errors are ours.

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