Optimal Contracting with Aspirational Utility

Feb 17, 2026

Alejandro Rivera, Fernando Zapatero, Hongda Zhong

Working Paper No. 00201-00

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This paper characterizes the optimal contract when the agent is endowed with aspirational utility. Our analysis reveals that effort and aspirations act as complements: the principal utilizes aspirational ``boosters'' to induce local risk-loving behavior, reducing the welfare costs of incentives and leading to higher effort levels. We find that the optimal compensation contract features a discontinuous jump to reach the aspiration point after good performance, followed by a region of ``sticky wages'' where compensation remains constant despite sustained high effort. Importantly, aspirations not only serve to incentivize effort by making the agent ``aspire'' to reach a high compensation level, but also by the fear of losing it. Finally, we explore cross-sectional implications, showing that more productive firms reach aspiration thresholds sooner, while high volatility firms optimally delay these rewards due to increased agency costs.


Fernando Zapatero

Fernando Zapatero

Hongda Zhong

Hongda Zhong

University of Texas at Dallas