Differences in Social Preferences: Are They Profitable forthe Firm?

This paper analyzes the impact of heterogeneous (social) preferences on theweighting and combination of incentive performance measures as well as on a firm’sprofitability within a principal-agent framework. Previous literature had failed torecognize heterogeneity effects. We consider rivalry, pure self-interest and altruismas extreme forms of such preferences within the spectrum of possible alternatives,and show that firm profits are maximized when differentiation among agents ismaximized with respect to individual (social) preferences. In order to realize thesegains in profitability, it is necessary that a firm directs principals to reallocateparticipation in performance measures so that competitive agents are privileged overaltruistic agents. By modeling the need to incorporate heterogeneity of agents weprovide insights that differences in social preferences can be managed to improvewage compensation and other business administration deliberations within adecentralized firm....