Hierarchical Control and Altruistic Differences

Comparison of three related adverse selection models is presented. There is a selfish owner, a selfish employee, and an imperfectly altruistic employee. Model 1 involves hiring choice. The owner hires the altruist because he produces the same for less pay due to his positive externality for the owner. An alternative interpretation is two owners each hiring one of the employees. Model 2 involves direct contracting with both employees hired. The efficiency/rent tradeoff involves less rent for the altruist and greater production for the selfish employee due to the altruist’s externality gain from hiring the selfish employee with his increased production. Model 3 is a three-level hierarchy where one employee is promoted and contracts with the other employee. Promotion of the selfish employee leads to an ex-ante equivalent solution as in Model 2. A control loss is suffered if the altruist is promoted. The selfish manager is willing to maximize owner profit in contracting with the laborer, but the altruist with his positive externality for the laborer offers a labor contract that does not maximize profit. Thus, the owner promotes the selfish employee. The Models 2/3 solutions show that merging the two (alternative) Model 1 provides a control gain helping efficiency and both owners and employees