Motivational investments and financial incentives

Maitreesh Ghatak and Zaki Wahhaj

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: If firms can invest in the motivation of workers to undertake costly effort, how does that affect the choice of explicit financial incentives? 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 reduces the cost of effort. We refer to these as guilt and inspiration, respectively. We characterize the conditions under which motivational investments and financial incentives are substitutes and complements, and find that it depends on the type of the investment as well as whether the worker’s participation constraint is binding.

JEL-codes: D23 D86 D91 J33 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2025-03-28
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Published in Journal of Law, Economics, and Organization, 28, March, 2025. ISSN: 8756-6222

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