Policy consequences of pay-for-performance and crowding-out

Bruno Frey

Journal of Behavioral Economics for Policy, 2017, vol. 1, issue 1, 55-59

Abstract: Crowding Theory is part of Behavioral Economics; it takes into account that human beings are motivated by both extrinsic and intrinsic motivation. In contrast, pay-for-performance intends to raise performance by making compensation dependent on the performance determined ex ante by relying on extrinsic motivation. Yet, empirical evidence demonstrates that pay-for-performance under identifiable conditions leads to undesired worker performance. As a policy consequence, the government in the public sector, as well as charitable and humanitarian organizations relying on volunteers, should be very careful to institute pay-for-performance schemes due to the risk of crowding-out intrinsic motivation. Using pay-for-performance in such activities is in most cases incompatible and inconsistent with the organizations' goals and tends to lead to poor or at least unsatisfactory work activities.

Keywords: crowding-out; pay-for-performance; intrinsic motivation; extrinsic motivation; anomalies (search for similar items in EconPapers)
JEL-codes: D04 J33 J48 L3 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (7)

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