On the Hidden Costs of Incentive Schemes

Dirk Sliwka

No 844, IZA Discussion Papers from Institute of Labor Economics (IZA)

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; motivation crowding-out; intrinsic motivation; honesty (search for similar items in EconPapers)
JEL-codes: D23 J33 M52 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2003-08
New Economics Papers: this item is included in nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

Published - revised version published as IZA DP 2293 and in: American Economic Review, 2007, 97 (3), 999 - 1012

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Working Paper: On the Hidden Costs of Incentive Schemes (2003)
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