Forgive or Punish. The Impact of Altruistic Supervision on Shirking

We study an efficiency-wage model where a principal hires a middle-layer of supervisors to control a group of potentially shirking workers. The assumption is that supervisors have concerns for their workers’ wellbeing and vice-versa. We find that the supervisors’ altruism has a negative effect on labor effort, as altruistic supervisors resent punishing shirkers. Moreover, this effect is increasing in the workers’ compensation. This is at odds with the usual recommendation from the shirking-type efficiency-wage theory. However, the mechanism is mitigated by the workers’ altruism, as altruistic workers resent exposing their supervisors to the risk of being fired for their forgiveness.