Adverse selection with pride, anger or fairness concerns

We consider the impact of several emotions that an agent may feel when dealing with some principal. We focus on the canonical adverse selection model: an agent acts/produces under private information on his costs. First, due to pride, concerns for self-esteem or reputation, or simply because of angry emotions, the agent may refuse contracts that do not provide him with a minimum share of the surplus created. This creates specific, endogenous, typedependent reservation utilities. A more demanding agent induces higher equilibrium output levels. One can re-interpret the model as relaxing the traditional assumption that the principal has all the bargaining power. This assumption has been justified as allowing to assess the minimum costs of asymmetric information for the principal. We show however that it may lead to underestimating output, and to overestimating the distortions imposed in response to asymmetric information. An alternative modeling is considered, to better represent other emotions, jealousy or envy. Such feelings increase the value of monetary transfers and reduce information rents, but may or not reduce equilibrium transfers. Predictions are quite sensitive to the exact type of concern or emotion considered – which calls for the use of a precise vocabulary in theory and experiments. JEL Codes: D63, D82, D87.