I show that an agent's motivation to do well (objectively) may be unambiguously bad in a world with differing priors, i.e., when people openly disagree on the optimal course of action. The reason is that an agent who is strongly motivated is more likely to follow his own view of what should be done. As a result, the agent is more willing to disobey his principal's orders when the two of them disagree on the right course of action. This effect has a number of implications. First of all, agents who are subject to authority will have low-powered incentive pay. Second, intrinsically motivated agents will be more likely to disobey and less likely to be subject to authority. Firms with intrinsically motivated agents will need to rely on other methods than authority for coordination. Moreover, an increase in intrinsic motivation may decrease all players' expected utility, so that it may be optimal for a firm to look for employees with low intrinsic motivation. Finally, subjective performance pay may be optimal, even when the true outcome of the project is perfectly measurable and contractible. Through this analysis, the paper identifies an important difference between differing priors and private benefits (or private information): with differing priors, pay-for-performance can create agency problems rather than solving them.
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Paper provided by Massachusetts Institute of Technology (MIT), Sloan School of Management in its series Working papers with number
18180.
Length: Date of creation: 08 Jul 2005 Date of revision: Handle: RePEc:mit:sloanp:18180
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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.:
Barberis, Nicholas & Thaler, Richard, 2003.
"A survey of behavioral finance,"
Handbook of the Economics of Finance,
in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128
Elsevier.
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