Psychological Safety and Positive Managerial Attention

I construct a manager-agent model, where the manager decides on investing in attention technology, which recognizes good agent’s performance, and psychological safety, which improves attention technology quality and decreases the agent’s cost of effort. The manager also determines the bonus level, which is then paid out when the agent receives recognition for his effort. I find the social optimum and compare it to what the manager and agent would choose to maximize their individual payoffs. I show that psychological safety is underinvested, while the effort level is too low due to moral hazard problem. I also consider settings where the bonus is capped or exogenously fixed, which potentially may both increase social welfare and encourage the manager to invest in psychological safety. My model helps to explain why psychological safety levels are higher in big, high-paying companies. Additionally, it suggests explanation for why bonus constraints could be beneficial for social welfare.