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On the Hidden Costs of Incentive Schemes

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Author Info
Sliwka, Dirk () (University of Bonn and IZA Bonn)

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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.

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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 844.

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Length: 41 pages
Date of creation: Aug 2003
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Handle: RePEc:iza:izadps:dp844

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Related research
Keywords: incentives; intrinsic motivation; motivation crowding-out; honesty;

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Find related papers by JEL classification:
M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  5. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, vol. 90(5), pages 1346-1361, December. [Downloadable!] (restricted)
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    Other versions:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Shchetinin, Oleg, 2008. "Altruism and Career Concern," MPRA Paper 9414, University Library of Munich, Germany. [Downloadable!]
  2. Guido Friebel & Wendelin Schnedler, 2007. "Team Governance: Empowerment or Hierarchical Control," IZA Discussion Papers 3143, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  3. Armin Falk & Michael Kosfeld, . "Distrust - The Hidden Cost of Control," IEW - Working Papers iewwp193, Institute for Empirical Research in Economics - IEW. [Downloadable!]
    Other versions:
  4. Wendelin Schnedler & Radovan Vadovic, 2007. "Legitimacy of Control," The Centre for Market and Public Organisation 07/178, Department of Economics, University of Bristol, UK. [Downloadable!]
    Other versions:
  5. Patricia Crifo & Jean-Louis Rullière, 2004. "Incentives and Anonymity Principle: Crowding Out Toward Users," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  6. Pouliakas, Konstantinos & Theodossiou, Ioannis, 2009. "Rewarding Carrots & Crippling Sticks: Eliciting Employee Preferences for the Optimal Incentive Mix in Europe," MPRA Paper 14167, University Library of Munich, Germany. [Downloadable!]
  7. Ellingsen, Tore & Johannesson, Magnus, 2006. "Pride and Prejudice: The Human Side of Incentive Theory," CEPR Discussion Papers 5768, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  8. Armin Falk & Michael Kosfeld, . "The Hidden Costs of Control," IEW - Working Papers iewwp250, Institute for Empirical Research in Economics - IEW. [Downloadable!]
    Other versions:
  9. Oliver Gürtler, 2008. "Implicit contracting with a (potentially) reliable agent," Journal of Economics, Springer, vol. 94(2), pages 177-189, July. [Downloadable!] (restricted)
  10. Oliver Gürtler, 2006. "Implicit Contracts: Two Different Approaches," Discussion Papers 110, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
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