Guilt, Esteem, and Motivational Investments

Maitreesh Ghatak and Zaki Wahhaj

No 15172, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: What are the determinants of an organization's investment in the loyalty and motivation of its workers? We develop a simple principal-agent model where the standard optimal contract is to offer a bonus that trades off incentive provision versus rent extraction. We allow the principal to undertake two types of motivational investments - one that increases the agent's disutility from deviating from a prescribed effort level, and another that increases the agent's on-the-job satisfaction. We argue that these two types of investments can capture a range of organizational practices - other than extrinsic rewards - that aim to raise worker motivation. We show that the two types of motivational investments are complements and both are substitutes to financial incentives. Our analysis implies that technological improvements in the form of improved worker productivity or greater observability of output will induce profit-maximizing firms to make greater use of financial incentives and less use of motivational investments. The reason is that while financial incentives have constant returns in terms of its effect on the worker's effort level, motivational investments by their very nature have decreasing returns.

Keywords: Motivated agents; Investment in worker motivation; Job satisfaction; Worker moral hazard (search for similar items in EconPapers)
JEL-codes: D23 D86 D91 J33 (search for similar items in EconPapers)
Date: 2020-08
New Economics Papers: this item is included in nep-hpe, nep-hrm and nep-mic
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