Why Does The Introduction of Monetary Compensation Produce A Reduction In Performance?

Harvey S. James
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Harvey S. James: University of Missouri

Microeconomics from EconWPA

Abstract: According to empirical evidence, extrinsic incentives often crowd out intrinsic motivation, thus reducing the effort choices of workers. This article presents a simple model illustrating how the introduction of monetary incentives causes a discontinuous reduction in worker effort as well as a reduction in worker motivation to act in the interest of a principal. The primary finding is that motivation crowding out occurs when then the object of an agent's intrinsic motivation is a principal who is also the source of the extrinsic compensation the agent receives. When intrinsic satisfaction is directed at more generalized social norms of behavior, however, extrinsic rewards will not crowd out intrinsic motivation.

Keywords: Principal-agent problem; incentive compensation; intrinsic motivation; motivation crowding out (search for similar items in EconPapers)
JEL-codes: D64 J33 L22 (search for similar items in EconPapers)
Date: 2003-03-12
Note: Type of Document - Microsoft Word 2000; prepared on IBM PC ; to print on HP; pages: 21; figures: included
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpmi:0303005

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