Publication Date: May 2003
We interpret workers’ conﬁdence in their own skills as their morale, and investigate the implication of worker overconﬁdence on the ﬁrm’s optimal wage-setting policies. In our model, wage contracts both provide incentives and aﬀect worker morale, by revealing private information of the ﬁrm about worker skills. We provide conditions for the non-diﬀerentiation wage policy to be proﬁt-maximizing. In numerical examples, worker overconﬁdence is a necessary condition for the ﬁrm to prefer no wage diﬀerentiation, so as to preserve some workers’ morale; the non-diﬀerentiation wage policy itself breeds more worker overconﬁdence; ﬁnally, wage compression is more likely when aggregate productivity is low.
Overconﬁdence, Worker morale, Wage-setting policies
JEL Classification Codes: J31, D82
Published in Journal of Monetary Economics (May 2005), 52(4): 749-777 [DOI]