

Department of Social Systems and Management
Discussion Paper Series

No.1301

Guilty Conscience and Incentives
byKyota EGUCHI

October 2012

UNIVERSITY OF TSUKUBA
Tsukuba, Ibaraki 305-8573
JAPAN

Guilty conscience and incentives*

Kyota Eguchi**
University of Tsukuba
Department of Policy and Planning Sciences
August 2/12
2012/08/15

Abstract
There are two kinds of error on performance assessment, undervaluation andovervaluation. In overvaluation, workers are unwilling to correct their performanceassessment because their wages decrease by doing that. In undervaluation, workers willcorrect their assessment, but managers are unlikely to accept workers' claims. This typeof selfish behaviors causes guilty conscience if others trust them. Otherwise, they do not
feel guilty conscience. Guilty conscience hinges on trust of others. I consider
endogenous guilty conscience and optimal incentive, and show that a high-powered
incentive scheme is desirable for conscientious or self-conscientious people, but is not
for the middle type.
JEL Classification Numbers: D03, D82, J41.
Key Words: Performance assessment error, Guilty conscience, and Strategic informationtransmission* This research was partially supported by Grant-in-Aid for Scientific Research of the Japanese

Ministry of Education.
Correspondence: Kyota Eguchi, University of Tsukuba, Department of Policy and Planning
Sciences (Shako), 1-1-1, Tennou-dai, Tsukuba, Ibaraki 305-8573, Japan.
e-mail: eguchi@sk.tsukuba.ac.jp
1**1. Introduction
Performance assessment is crucial to an organization, which leads managers toattempt to assess accurately. Even so, assessment is not always accurate, and errors areinevitable. There are two kinds of error, undervaluation and overvaluation. In
overvaluation, workers tend not to tell that they are over-evaluated, because their wages
would be reduced on speaking up. In contrast, workers are willing to correct assessmenton themselves in undervaluation. This time, however, managers may ignore workers'
claims because accepting them increases wage payment. Thus, modification of wrong
performance assessment is not easy to implement.
If wage payment is not contingent on worker performance, that is, a fixed
payment scheme is offered, modification of wrong assessment is easy to implement.
Workers would never hesitate to tell the truth in overvaluation, and managers would
also accept the workers' claims in undervaluation without increasing wage payment.
Unfortunately, a fixed payment scheme fails to give incentives to workers: There is atrade-off relationship between ex ante incentive to show high performance and ex post
one to tell the truth. If worker incentive is a crucial factor, it seems that we fails tocorrect wrong assessment. That would be true if we were selfish and less-minded, butthat is always not if we are not homo economicus but human being. In this paper, I
consider a situation in which they feel guilty conscience when they take selfish action at
the sacrifice of somebody's benefits, and investigate the effect of guilty conscience toworker incentive.
It is difficult to capture how we feel guilty conscience, thus various model
settings can be available. Recent psychological game studies such as Dufwenberg andGneezy (2000), Ellingsen and Johannesson (2004), and Gneezy (2005), which havecomparatively different focus, show that we tend to take selfish action when we can get
pecuniary benefits more by doing so. This means that a high-powered incentive scheme,
which encourages a worker to show high performance, is likely to cause the worker's
selfish behavior in overvaluation and the manager's rejecting the worker's claim in
undervaluation. To prevent selfish behavior, a less-powered incentive scheme can bebetter. This is a well-known outcome that some distortions are inevitable when there issomething uncontrollable through incentive schemes. For example, in the multitasks
incentive model by Holmstrom and Milgrom (1991), a high-powered incentive scheme
mainly associated with observable tasks (e.g., quantities) is suboptimal as it fails to
devote significant resource and care into unobservable but essential tasks (e.g.,2qualities). Similarly, Baker (1992) (2002) shows that a less incentive scheme should beoffered when performance indexes are inaccurate. In the context of rank-order
tournaments, as shown in Lazear (1989), a big prize of tournaments tends to induce
workers to inflict on their colleagues rather than to put forth their effort for highperformance. This paper also belongs to the literature stem from the strings of thestudies.
Moreover, it is a crucial issue to consider under what circumstances we feelguilty conscience. Even if we take unjust action selfishly, we may not feel guilty
conscience very much when other people around us do something similar. It is
associated with others' behaviors or ethical circumstances around us. For example,
Tennyson (1997) focuses on the U.S. data in 1991 on car insurance fraud and shows that
attitudes toward insurance fraud is positively and significantly related to others' fraud
attitudes. In the context of principal-agent relations, as pointed out in Huang and Wu(1994) and Charness and Dufwenberg (2006), guilty conscience is associated with what
other parties expect. If you betray others even though they trust you, you will feel guilty
conscience very much. On the contrary, unless others trust you, you are unlikely tosuffer from guilty conscience. Guilty conscience is influenced by others' belief.
In my model, if a manager expects that a worker shows the truth with highprobability, that is, the manager trusts the worker, the worker's selfish behavior isregarded as a serious betrayal, thus the worker incurs much psychological burdencaused by guilty conscience. In contrast, if the manager expects that the worker is likely
to show selfish behavior, the worker is unlikely to feel guilty conscience for his own
selfish behavior. What they expect their other parties to do is associated with their
behaviors and guilty conscience. The purpose of this paper is to consider how an
optimal incentive scheme hinges on what they expect the behavior of others: Guilty
conscience is endogenously concerned as social interaction. As recent studies like Mas
and Moretti (2009) and Bandiera, Barankay and Rasul (2010) indicate that not only
monetary incentive but also social one is of importance, it is also crucial to consider theeffect of guilty conscience to worker incentive under the situation in which their guilty
conscience is associated with belief of other parties.
When we confront a conflict between the ex ante incentive to show highperformance and the ex post incentive to tell the truth, a high-powered incentive scheme
is suboptimal for the middle type worker, who is conscientious to some extent. They are
between a self-conscientious worker, who does not feel guilty conscience seriously, anda conscientious worker, who feels guilty conscience very much. A conscientious worker
3

is more likely to tell the truth in overvaluation, thus a high-powered incentive scheme
should be offered. On the other hand, a self-conscientious worker, who rarely tells thetruth in overvaluation, will also face a high-powered incentive scheme. Although it
seems that a less-powered incentive scheme should be offered to a self-conscientious
worker to prevent the selfish behavior, it is not effective to induce the self-conscientious
worker to tell the truth. The ex ante incentive to show high performance is only a key
issue for them. Therefore, a high-powered incentive scheme is optimal for both aself-conscientious and a conscientious worker, although the reasoning is different. The
same outcomes are applied to each type of managers. Especially, excessively
high-powered incentive scheme is offered in the situation in which they are much more
self-conscientious.
Additionally, it will be shown that when a manager is more self-conscientious
than a worker, the distortion on worker incentive is more amplified, but it is likely todisappear as the worker is more conscientious. In contrast, with a more conscientious
manager, the distortion regarding worker incentive is comparatively small, but it islikely to remain.
This paper is organized as follows. In section 2, a basic model is built toanalyze the effect of guilty conscience to worker incentive. Although I focus on asimple linear scheme, it is too complicated to solve the model analytically, thus
computer simulation will be conducted. In section 3, I consider an alternative setting ofendogenous guilty conscience, but the main outcome is not influenced. Section 4 gives
conclusion.

2. The model
1. Strategic information disclosure
I consider an employment relationship between a manager and a worker, where
the worker is required to show high performance. The worker can contribute x in profit
at the effort cost of x 2 / 2 . The manager assesses the worker’s contribution with error,yx  H , where İ is stochastically followed by a normal distribution N (0, V2 ) . The

manager's assessment y including errors is verifiable to a third party, thus the worker's
wage can be conditional on his performance assessment. If the worker receives a highperformance assessment, he gets high wage. In this paper, it is assumed that the4manager offers a linear wage scheme, w(y)=ay+b, in which the piece rate and the fixed
payment denoted as a and b, respectively.
A worker has informal evidence on his authentic performance, x. Although theworker's informal evidence is not verifiable to a third party, the manager realizes thatthe informal evidence is right: the worker cannot make any fake evidence.1 That does
not mean that the worker will always show his informal evidence: The worker canstrategically choose whether to disclose his authentic performance. There are two cases
to explore: [1] If the worker is underestimated as x > y, he is willing to show his
authentic performance to require the decent wage w(x). [2] If the worker isoverestimated as x < y, he can keep silent and receive the higher wage w(y) without
showing it. Hiding informal evidence only happens in overvaluation.
Similarly to the worker, the manager will not always accept the worker's claim
and pay the decent wage based on his authentic performance. The manager always
accepts the claim whenever doing that reduces wage payment. In contrast, if wage
payment increases by accepting the claim, she may ignore it. She can strategically makea decision on the acceptance. Therefore, in overvaluation, although the manager iswilling to accept the worker's claim, the worker will keep silent. On the other hand,
although the worker shows the informal evidence in undervaluation, the manager neveraccepts it. If they are selfish, any information transmission is not implemented.
However, if they feel guilty conscience for their selfish behaviors, the result may bechangeable.
In this model, it is crucial that the worker's informal evidence on his authentic
performance is unverifiable. If it was verifiable, they could make an agreement on an
incentive scheme based on the worker's claim, which would be like a self-reported
scheme. If they could use a self-reported scheme, any problem would never appear. The
reason is well-known as the full information disclosure theorem.2 When the worker
shows informal evidence, the worker would receive wage conditional on the evidence,otherwise he would get nothing. In this case, the worker would always show informal
evidence on his authentic performance, thus they could avoid assessment error. In
contrast, as concerned in this paper, if the worker's evidence is unverifiable, they cannot
use any self-reported scheme. Even if the worker's informal evidence shows high1

If the worker's information is just a message, the manager is not convinced by the worker's
message. This is a cheap talk case, which is out of my focus in this paper.
2 See Grossman and Hart (1980), Grossman (1981), and Okuno-Fujiwara, Postlewaite, andSuzumura (1990).
5performance, the manager will not pay the decent wage to the worker, as well-known asa hold-up problem.
The timing of their behaviors is as follows:[1] A manager offers a worker a liner scheme, w(y)=ay+b.
[2] The worker decides how much contribution is made.
[3] The manager assesses the worker’s performance as y.
[4] The worker makes a decision whether to show informal evidence on his authentic
performance.
[5] If the manager receives informal evidence, she chooses whether to accept it or not.
2. Guilty conscience
Overvaluation induces a worker to keep silent, and gives him higher wage
more than the decent wage based on his authentic performance. However, an overvalued
worker feels guilty conscience because he takes some benefits, which should belong to
the manager, by keeping silent. Psychological burden caused by selfish behavior isgiven by c. The psychological burden is incurred by the worker only in overvaluation,and it is a constant and independent of the degree of overvaluation.
Although the worker can take a part of profit from the manager by keeping
silent, keeping silent does not always lead to guilty conscience. If the manager expects
the worker to keep silent, the worker is unlikely to feel guilty conscience. In this case,keeping silent is regarded as a kind of "preestablished harmony" between them, thus theworker does not feel guilty conscience in this case.3 In contrast, when the manager
anticipates that the worker always tells the truth, the worker's taking a part of profit,
which should belong to the manager, is just a betrayal, thus the worker faces a dilemma
between monetary earnings and guilty conscience. Actually, Charness and Dufwenberg(2006) indicate that guilty conscience is not always caused by telling just a lie in theirmessage game experiment, where players were likely to feel guilty conscience when
they betrayed their partners even though their partners trust them.
Guilty conscience of a worker is associated with what his manager expects. In
this paper, I follow the model setting of a psychological game by Huang and Wu (1994).
I denote the probability as q with which the worker shows his informal evidence. The
manager guesses probability q of the worker's telling the truth, thus psychological3

I realize that this is controversial, but a poker game is often raised as an example to support thisviewpoint. In a poker game, they play selfishly and deceive other players, but all players will not feelguilty conscience. Power games of politicians are also typical examples of its kind.
6

burden of the worker is associated with probability q, and is assumed as cq. This meansthat psychological burden of the worker is maximized when the manager expects theworker to always show the truth. As I show later, probability q can be endogenously
derived by rationally thinking about their behaviors.
In the prospective of guilty conscience, the worker makes a decision whether toshow his authentic performance. When it holds that w( y )  cq d w( x) , the worker willshow his informal evidence, otherwise he does not. The result is given as the following
lemma:
Lemma 1
A worker hides informal evidence on his authentic performance to receive the wage,
w(y), based on the manager's assessment in the case of H ! cq / a . Otherwise, he shows
his authentic performance x to avoid psychological burden and receive the wage, w(x).
Since performance assessment y is verifiable, the manager has to pay the wage w(y)even if she realizes that the worker hides his authentic performance. Clearly, the worker
is likely to confess as the piece rate a is smaller or the psychological burden c is larger.
They can anticipates the critical point, cq/a, thus probability q is given at theequilibrium as the solution of q³cq / af

I(H)d H , where I(H) is the density function ofassessment error İ. The probability is always more than 1/2 because even an extremely
self-conscience worker with c=0 shows her informal evidence in undervaluation. Hence,the solution q* uniquely exists under a particular a and c, thus it is a function of a and cdenoted as q*(a, c).4
Similarly to the worker, psychological burden of the manager is given by d. I
also denote the conditional probability as p with which the manager accepts the worker's
informal evidence when the manager receives it. Psychological burden of the manager
is assumed as dp. Probability p is also endogenously derived by their behaviors. In thecase of w( y )  dp d w( x) , the manager is willing to ignore the informal evidence.
Lemma 2A manager always accepts the worker's claim in overvaluation. In undervaluation,
she will accept it in the case of H t dp / a , otherwise reject.

4

A different setting of guilty conscience will be considered in the next section.
7

Similarly, the manager and the worker realize conditional probability p with which the
manager accepts the worker's claim when the worker shows it. Since the worker shows
the informal evidence in the case of H  cq / a , the manager accepts it in the case ofdp / a d H  cq / a . Probability p satisfies the equation: p³

cq*/ a dp / aI(H)d H³cq*/ af

I(H)d H .

This equation is written as follows:p 1

) ( dp / a ).
q*...(1)The solution uniquely exists and is a function of a and c denoted as p*(a, c).
3. Effect of guilty conscience
From lemma 1 and 2, the behaviors of the manager and the worker are
summarized given an incentive scheme as follows:
Proposition 1[1] In the case of H  dp * / a , the worker shows his informal evidence, but the
manager rejects it. The worker receives the wage w(y) specified by the manager's
assessment. Since the manager rejects the worker's claim, she incurs the psychologicalburden, dp*.
[2] In the case of dp * / a d H  cq * / a , the worker shows his informal evidence,then the manager accepts it. The worker receives the decent wage w(x) based on his
authentic performance.
[3] In the case of cq * / a d H , the worker hides his informal evidence, thus receives
the wage w(y) specified by the manager's assessment with the psychological burden,cq*.
It is clear that the manager pays w(y) in the case [1] and [3]. In the case [2], themanager's assessment is corrected. In this case, it is needed to confirm whether the
manager offers the decent wage based on the worker's authentic performance, because
the manager can offer a different wage that the worker may accept theoretically.
When the worker confesses his authentic performance in overvaluation andrequires the decent wage w(x) less than w(y), the manager will pay w(x).
8Next, in undervaluation, w(y)<w(x), I need to consider whether the manager
offers a different wage from w(x) or w(y).
i) If the manager offers a wage lower than w(y) after receiving the worker's claim, theworker never accepts it. Thus, a wage payment lower than w(y) is not offered.
ii) Next, I confirm whether the manager pays a wage w' between w(y) and w(x). In thiscase, the manager's wage payment with psychological burden is given as w'+dp, which
is more than that upon rejecting the worker's claim, w(y)+dp. Thus, the manager has no
incentive of offering the wage w'. The decent wage, w(x), is paid.
iii) Obviously, the manager will not offer a wage higher than w(x).
Thus, the decent wage w(x) is optimal for the manager in the case ofdp * / a d H  cq * / a . Eventually, wage payment is either w(y) or w(x).
Proposition 1 indicates that small assessment error is corrected regardless ofovervaluation and undervaluation, but that big one is not. Thus, when the worker shows
performance x, his expected payoff is given by     
EU ( x) { ax  b  ³

 dp*/ afaHI(H)d H  ³

fcq*/ a(aH  cq*)I(H)d H 

x2.
2

The worker optimizes his performance level given an incentive scheme, thus the firstorder condition is simply given as a x : The worker is more encouraged as he faces ahigher piece rate.
Similarly, the expected profit of the manager is given as follows:
3 { (1  a ) x  b  ³

 dp*/ af( aH  dp*)I(H)d H  ³

fcq*/ aaHI(H)d H .

...(2)The manager is willing to maximize the above expected profit (2) subject to theconstraints on incentive compatibility and individual rationality of the worker. Incentive
compatibility is given by a x . It is also needed to hold as individual rationality that
EU ( x) t 0 , where the worker’s outside option is zero. The manager can minimize thefixed payment as long as the individual rationality is satisfied, thus the individual
rationality is binding at the equilibrium. Hence, the expected profit of the manager isrewritten by9

3 {a

a2
 cq *(1  q*)  dp * ) (dp * / a) .
2...(3)The optimal piece rate a* maximizes the above expected profit. In this model, theworker and the manager are risk neutral, thus the manager can take all benefits of theworker through the sufficiently low fixed payment. As the result, the manager
compensates the worker's psychological burden, thus the psychological burdens of theworker and the manager affect the piece rate. In a typical moral hazard model as abenchmark in which they do not feel guilty conscience: c d 0 , the optimal piece
rate is given by a BM 1 .
First, I consider a situation of c=d, in which the manager is the same type as theworker in terms of guilty conscience. In general, this model is easy to understand, but
too complicated to solve analytically, hence computer simulation will be conducted. The
computer simulation shows the ambiguous relationship between psychological burden
and incentives. As the four curves shown in figure 1 indicate, the optimal piece rates
first increases a little, then drastically decreases, finally increases again, as
psychological burden is serious. This feature is observed regardless of standard
deviations of assessment error. The result is summarized as a proposition:
Proposition 2[1] High worker incentive is desirable for both conscientious and self-conscientious
people. Especially, excessively high incentive is offered when they incur small
psychological burden. In contrast, a less-powered one is better for the middle type, who
are conscientious to a certain extent.
[2] As the manager's assessment is inaccurate, a more high-powered incentive scheme
should be offered for self-conscientious people, but a much less-powered one isdesirable for conscientious people to a certain extent.
If a worker is conscientious, he is almost always willing to show his authentic
performance, even though he is over-evaluated. The manager rarely compensates theworker's psychological burden caused by keeping silent in overvaluation. Additionally,a conscientious manager will almost always accept the worker's claim, thus she also
rarely bears her own psychological burden. When they are very conscientious with highc and d, they are unwilling to show selfish behaviors. Accordingly, the manager willoffer a high-powered incentive scheme, which is almost identical to the benchmark case.
10

Actually, when c and d are sufficiently high, the manager anticipates that the worker ismore likely to tell the truth in overvaluation, thus q will be convergent to 1. This
indicates that the probability of keeping silent converges to zero. Similarly, as (1) shows,p and ) ( dp / a ) converges to 1 and 0, respectively. Therefore, when c and d are
sufficiently high, the optimal piece rate is convergent to 1: a* o 1 .
When the manager and the worker are conscientious to a certain extent, a highpiece rate causes psychological burden because the worker is more likely to keep silent
in overvaluation and the manager tends to ignore the worker's claim in undervaluation.
Thus, in this case, as shown in figure 1, a less-powered incentive scheme is likely to be
desirable.
Finally, I consider a situation with self-conscientious people. Since a
self-conscientious worker hardly feels guilty conscience, that means very low c,
information disclosure is rarely observed in overvaluation. The worker rarely suffersfrom guilty conscience, thus the manager does not compensate the worker's
psychological burden very much. The similar thing is applied for a self-conscientious
manager, therefore a high-powered incentive scheme should be offered. Although thiscase is similar to the benchmark case, there is a noteworthy respect. As shown in figure
1, the optimal piece rate can be more than aBK in the benchmark case when their
psychological burden is small but positive. When the manager's psychological burden d
is very small, the probability of the manager to accept the worker's claim is almost zero.
In this case, if parameter d increases slightly, the manager can keep probability p* toalmost zero by increasing the piece rate: A higher piece rate decreases the expected
psychological burden of the manager. Thus, a high-powered incentive scheme of which
the piece rate is more than 1 can be desirable.
I can find another outcome. As standard deviation of the error distribution islarge, a worker is likely to hide his informal evidence and a manager is likely to reject
the worker's claim. This leads to more psychological burden incurred by the manager
when they are conscientious to a certain extent, thus the manager is willing to reduce
psychological burden by decreasing the piece rate enough. As standard deviation islarge, the effect of guilty conscience is amplified, as shown in figure 1.
The above simulation is a case in which psychological burden is identicalbetween a manager and a worker. Next, I consider a situation in which their
psychological burdens are different. Optimal incentive schemes are given in figure 2
when psychological burden of a manager is fixed under a Normal distribution N[0, 0.32].
The optimal piece rate under d =1 is higher than that under d =0.5 because high11

psychological burden keeps a manager from showing selfish behavior, thus a more
incentive scheme is offered. The curve under d =0.3 is a little complicated, because ahigh-powered incentive scheme is better for self-conscientious or conscientious people,
but it is not for the middle type.
Finally, I compare worker incentive in the case of a more conscientious
manager with that in the case of a more self-conscientious one. The outcome shown infigure 3 is under a Normal distribution, N[0, 0.32]. When a worker faces a more
conscientious manager, d=1.5c, the optimal piece rate first increases much more thanwhen a worker faces the same type manager, d=c. After that, the optimal piece rate in
the case of d=1.5c falls, then gets back to the benchmark level more quickly comparedto that in the case of d=c. On the other hand, when a worker faces a more
self-conscientious manager, d=0.5c, the optimal piece rate first increases, then decreases
more moderately than when he faces the same type manager, d=c. The effect of guilty
conscience is much more amplified with the self-conscientious manager (d=1.5c) thanwith the conscientious one (d=0.5c). It appears that the drop of the optimal piece rate ismuch more drastic with the self-conscientious manager (d=1.5c), but the effect is more
likely to disappear as they feel guilty conscience. In contrast, with the conscientious
manager (d=0.5c), the drop of the piece rate is mild, but tends to remain. The outcome issummarized as follows:
Proposition 3
When a manager is more self-conscientious than a worker, the optimal piece rate isunlikely to be distorted very much from the benchmark case, however, the distortion is
likely to remain for the wide range of psychological burden of a worker.

3. Alternative setting of guilty conscience
It is controversial under what circumstances and how people feel guilty
conscience. In this model guilty conscience of a worker is associated with what amanager expects the worker to show his informal evidence. The manager anticipates
probability q with which the worker shows informal evidence, and the probability is
crucial to guilty conscience of the worker: The probability is regarded as the degree oftrust in this model.
While the setting is reasonable, an alternative setting is conceivable. Guilty
12conscience of a worker may be associated with what a manager expects the worker to
do in overvaluation. Suppose that the probability on the worker's behavior, which isanticipated by the manager and associated with guilty conscience of the worker, is given
as solutions q# of q

2³cq / a0

I(H)d H . This is the conditional probability with which theworker shows his informal evidence in overvaluation. In this setting, there can be twosolutions: 0 and a positive solution. Even if psychological burden c of the worker ishuge, the worker may not show his informal evidence in overvaluation. If the manager
expects the worker not to tell the truth in overvaluation, the worker does not feel guilty
conscience at all. As the result, even the worker with huge psychological burden c will
not show his authentic performance, thus the manager's belief on the worker's behavior
is consistent with what the worker actually does. If probability p on the manager's
behavior is also given as the solutions p# of p

2³0

 dp / aI(H)d H , we see the similar

outcome on guilty conscience of the manager. Accordingly, there are two states: One isthat both the manager and the worker never trust each other, and the other is that they
trust other parties to some extent as concerned in section 2.
In this setting of guilty conscience, the expected profit of the manager issimilarly given by

3 {a

a2 1 #1
 cq (1  q # )  dp # (1  p # ) .
2 2
2When the manager and the worker do not trust each other, the worker never shows his
informal evidence in overvaluation and the manager rejects the worker's claim in
undervaluation: q #p#

0 . In this case, the optimal incentive is clearly a*=1.

On the other hand, if they anticipate that the probabilities are positive, that is,they expect their other parties to take conscientious actions to some extent, we have theoutcome similar to section 2. The optimal incentive under a Normal distribution

N [0, 0.32 ] is shown in figure 4 when the manager is the same type to the worker: c = d.
There is a discontinuous part represented by the dot lines on the optimal curves. Whenthe psychological burdens, c and d, are small, the probabilities, q and p, are positive
near zero. If the psychological burdens increase slightly from this, increase in the piece13

rate induces them to take selfish action, but it keeps probabilities q and p near zero.
Thus, the optimal incentive is over 1. As the result, the manger can avoid thepsychological burden caused by their selfish behaviors. The excessively high-powered
incentive scheme seems to give the worker more earnings through the selfish behavior,
but the manager can take it back by decreasing the fixed payment b sufficiently.
Therefore, worker incentive increases first as the psychological burden increases.
However, as excessively high worker incentive increases, it leads to distortion seriously,
then it is not negligible. After the psychological burden reaches a particular level, they
face a situation in which a less-powered incentive scheme is better than the excessively
high-powered one. Thus, there is the discontinuous part on optimal incentive schemes asshown in figure 4, and it hinges on the setting of guilty conscience.
The outcome is similar to section 2: High worker incentive is desirable for bothconscientious and self-conscientious people. Especially, excessively high incentive isoffered when they incur comparatively small psychological burden. In contrast, aless-powered one is better for the middle type, who are conscientious to a certain extent.
Additionally, as the manager's assessment is inaccurate, a more high-powered incentive
scheme should be offered for self-conscientious people, but a much less-powered one isdesirable for conscientious people to a certain extent.

4. Conclusion
I have considered opportunistic modification on performance assessment whenguilty conscience is associated with whether people trust others. Since it is very
complicated to specify optimal schemes in the general case, I have focused only on arisk-neutral and linier payment scheme case. Although I gave sacrificed the generality, it
is obtained the explicit relationship between incentives and guilty conscience. This
paper presents the following implications:z As a high-powered incentive scheme is offered, selfish behaviors are likely toappear: In overvaluation workers tend to hide their authentic performance, and inundervaluation managers are likely to ignore workers' claims. A high-powered
incentive scheme is suboptimal they are conscientious to a certain extent.
z If they are very conscientious, their selfish behavior is unlikely to appear, thus
psychological burden hardly distorts the incentive scheme: A high-powered
incentive scheme is desirable.
14z In contrast, if they are self-conscientious, workers will hide true information andmanagers ignore workers' claim. However, since the effect of psychological burden
is negligible, a high-powered incentive scheme is also desirable. Especially, when
they are almost perfectly selfish people with small but positive psychological burden,
the optimal piece rate is higher than when they feel no guilty conscience.
z As worker performance assessment is inaccurate, the effect of guilty conscience isamplified.
z When a manager is more conscientious than a worker, the optimal piece rate is
likely to be distorted very much from the benchmark case, however, the distortion
tends to disappear as guilty conscience is serious. In contrast, when a manager isless conscientious than a worker, the distortion of the piece rate is likely to be small,but comparatively remain.
Usually, we think that companies with conscientious people are desirable, but
this paper concludes that it is difficult to distinguish a company with conscientious
people by payment schemes: Similar incentive schemes are likely offered at both acompany with conscientious people and one with self-conscientious one. If there is anextremely high-powered incentive scheme in a company, you may find the company
and people cruel and bitter.

15

References
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Journal of Political Economy, vol.100, 598-614.
Baker, George (2002) "Distortion and Risk in Optimal Incentive Contracts,"
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17

a
1.1

1.0

V 0.1
V 0.2
V 0.3

0.9

V 0.4
0.8

0.7

0.6
0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

c

Figure 1
The relationship between the optimal piece rate and guilty conscience under c=d

18

a
1.1

d 0.3
1.0

d 1

0.9

d 0.5

0.8

0.7
0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

c

Figure 2
The optimal piece rate under standard deviation 0.3 and fixed manager's psychologicalburden

19

a
1.05

1.00

0.95

0.90

d 1.5cd 0.5c

0.85

0.80

d c
0.75

0.70
0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

c

Figure 3
The optimal piece rate under standard deviation 0.3 when the manager is a different
type from a worker

20

a
1.3

1.2

1.1

1.0

0.9

G2 0.1
G

0.8

0.7
0.0

G2 0.3
2

0.2

0.2

0.4

0.6

0.8

1.0

Figure 4
The optimal piece rate under c=d

21

1.2

1.4

c