On the Hidden Costs of Incentive Schemes

Bonn Econ Discussion Papers from University of Bonn, Germany

Abstract: By enriching a principal-agent model it is shown that the introduction of monetary incentives may reduce an agent's motivation. In a first step, we allow for the possibility that some agents stick to unverifiable agreements. The larger the fraction of reliable agents, the lower powered will then be the optimal incentive scheme and fixed wages become optimal when performance measurement is costly. If social norms matter such that some agents' reliability is influenced by their beliefs on the convictions of others, high powered incentives signal that not sticking to agreements is a widespread behavior and may lead to lower effort levels.

Keywords: Incentives; Intrinsic Motivation; Motivation Crowding-Out; Honesty (search for similar items in EconPapers)
JEL-codes: M52 J33 D23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-hpe
Date: Written 2003-05
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Related works:
Working Paper: On the Hidden Costs of Incentive Schemes (2003)
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