IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/109898.html
   My bibliography  Save this paper

Relational Incentives Theory

Author

Listed:
  • Gallus, Jana
  • Reiff, Joseph
  • Kamenica, Emir
  • Fiske, Alan Page

Abstract

Our life is built around coordinating efforts with others. This usually involves incentivizing others to do things, and sustaining our relationship with them. Using the wrong incentives backfires: it lowers effort and tarnishes our relationships. But what constitutes a ‘wrong’ incentive? And can incentives be used to shape relationships in a desired manner? To address these and other questions, we introduce relational incentives theory, which distinguishes between two aspects of incentives: schemes (how the incentive is used) and means (what is used as an incentive). Prior research has focused on means (e.g., monetary vs. non-monetary incentives). Our theory highlights the importance of schemes, with a focus on how they interact with social relationships. It posits that the efficacy of incentives depends largely on whether the scheme fits the relational structure of the persons involved in the activity: participation incentive schemes for communal sharing relations, hierarchy for authority ranking relations, balancing for equality matching relations, and proportional incentive schemes for market pricing relations. We show that these four schemes comprise some of the most prevalent variants of incentives. We then discuss the antecedents and consequences of the use of congruent and incongruent incentive schemes. We argue that congruent incentives can reinforce the relationship. Incongruent incentives disrupt relational motives, which undermines the coordinating relationship and reduces effort. But, importantly, incongruent incentives can also be used intentionally to shift to a new relational model. The theory thus contributes to research on relational models by showing how people constitute and modulate relationships. It adds to the incentives and contracting literatures by offering a framework for analyzing the structural congruence between incentives and relationships, yielding predictions about the effects of incentives across different organizational and individual-level contexts.

Suggested Citation

  • Gallus, Jana & Reiff, Joseph & Kamenica, Emir & Fiske, Alan Page, 2021. "Relational Incentives Theory," MPRA Paper 109898, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:109898
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/109898/1/MPRA_paper_109898.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ernst Fehr & Simon Gächter, 2000. "Fairness and Retaliation: The Economics of Reciprocity," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 159-181, Summer.
    2. Fehr, Ernst & Falk, Armin, 2002. "Psychological foundations of incentives," European Economic Review, Elsevier, vol. 46(4-5), pages 687-724, May.
    3. Evgeny Kagan & Stephen Leider & William S. Lovejoy, 2020. "Equity Contracts and Incentive Design in Start-Up Teams," Management Science, INFORMS, vol. 66(10), pages 4879-4898, October.
    4. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    5. Uri Gneezy & Stephan Meier & Pedro Rey-Biel, 2011. "When and Why Incentives (Don't) Work to Modify Behavior," Journal of Economic Perspectives, American Economic Association, vol. 25(4), pages 191-210, Fall.
    6. Edward P. Lazear & Kathryn L. Shaw, 2007. "Personnel Economics: The Economist's View of Human Resources," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 91-114, Fall.
    7. Bruno S. Frey, 1997. "Not Just for the Money," Books, Edward Elgar Publishing, number 1183.
    8. Dirk Sliwka, 2007. "Trust as a Signal of a Social Norm and the Hidden Costs of Incentive Schemes," American Economic Review, American Economic Association, vol. 97(3), pages 999-1012, June.
    9. George A. Akerlof & Rachel E. Kranton, 2005. "Identity and the Economics of Organizations," Journal of Economic Perspectives, American Economic Association, vol. 19(1), pages 9-32, Winter.
    10. Thomas Dohmen & Armin Falk, 2011. "Performance Pay and Multidimensional Sorting: Productivity, Preferences, and Gender," American Economic Review, American Economic Association, vol. 101(2), pages 556-590, April.
    11. Prendergast, Canice & Stole, Lars, 2001. "The non-monetary nature of gifts," European Economic Review, Elsevier, vol. 45(10), pages 1793-1810, December.
    12. Dora L. Costa & Matthew E. Kahn, 2003. "Cowards and Heroes: Group Loyalty in the American Civil War," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(2), pages 519-548.
    13. Jana Gallus & Bruno S. Frey, 2016. "Awards: A strategic management perspective," Strategic Management Journal, Wiley Blackwell, vol. 37(8), pages 1699-1714, August.
    14. William G. Ouchi, 1979. "A Conceptual Framework for the Design of Organizational Control Mechanisms," Management Science, INFORMS, vol. 25(9), pages 833-848, September.
    15. Steven Blader & Claudine Gartenberg & Andrea Prat, 2020. "The Contingent Effect of Management Practices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(2), pages 721-749.
    16. A. Peter McGraw & Janet A. Schwartz & Philip E. Tetlock, 2012. "From the Commercial to the Communal: Reframing Taboo Trade-offs in Religious and Pharmaceutical Marketing," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 39(1), pages 157-173.
    17. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
    18. Kreps, David M, 1997. "Intrinsic Motivation and Extrinsic Incentives," American Economic Review, American Economic Association, vol. 87(2), pages 359-364, May.
    19. Oliver Hart & John Moore, 2008. "Contracts as Reference Points," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(1), pages 1-48.
    20. Kandel, Eugene & Lazear, Edward P, 1992. "Peer Pressure and Partnerships," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 801-817, August.
    21. Lorenz Goette & David Huffman & Stephan Meier, 2006. "The Impact of Group Membership on Cooperation and Norm Enforcement: Evidence Using Random Assignment to Real Social Groups," American Economic Review, American Economic Association, vol. 96(2), pages 212-216, May.
    22. Gallus, Jana & Bhatia, Sudeep, 2020. "Gender, power and emotions in the collaborative production of knowledge: A large-scale analysis of Wikipedia editor conversations," Organizational Behavior and Human Decision Processes, Elsevier, vol. 160(C), pages 115-130.
    23. Alchian, Armen A & Demsetz, Harold, 1972. "Production , Information Costs, and Economic Organization," American Economic Review, American Economic Association, vol. 62(5), pages 777-795, December.
    24. Levine, David I., 1991. "Cohesiveness, productivity, and wage dispersion," Journal of Economic Behavior & Organization, Elsevier, vol. 15(2), pages 237-255, March.
    25. Stefano DellaVigna & Devin Pope, 2018. "What Motivates Effort? Evidence and Expert Forecasts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(2), pages 1029-1069.
    26. Roland Bénabou & Jean Tirole, 2003. "Intrinsic and Extrinsic Motivation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(3), pages 489-520.
    27. N. Anand & Brittany C. Jones, 2008. "Tournament Rituals, Category Dynamics, and Field Configuration: The Case of the Booker Prize," Journal of Management Studies, Wiley Blackwell, vol. 45(6), pages 1036-1060, September.
    28. Herbert A. Simon, 1991. "Organizations and Markets," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 25-44, Spring.
    29. George A. Akerlof & Rachel E. Kranton, 2000. "Economics and Identity," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(3), pages 715-753.
    30. Ostrom, Elinor & Walker, James & Gardner, Roy, 1992. "Covenants with and without a Sword: Self-Governance Is Possible," American Political Science Review, Cambridge University Press, vol. 86(2), pages 404-417, June.
    31. Judd B. Kessler & Stephen Leider, 2016. "Procedural Fairness and the Cost of Control," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 32(4), pages 685-718.
    32. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    33. Noah J. Goldstein & Robert B. Cialdini & Vladas Griskevicius, 2008. "A Room with a Viewpoint: Using Social Norms to Motivate Environmental Conservation in Hotels," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 35(3), pages 472-482, March.
    34. Benjamin E. Hermalin, 2012. "Leadership and Corporate Culture [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    35. Ernst Fehr & Oliver Hart & Christian Zehnder, 2011. "Contracts as Reference Points--Experimental Evidence," American Economic Review, American Economic Association, vol. 101(2), pages 493-525, April.
    36. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts and the Theory of the Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 39-84.
    37. Ernst Fehr & Oliver Hart & Christian Zehnder, 2008. "Contracts as reference points � experimental evidence," IEW - Working Papers 393, Institute for Empirical Research in Economics - University of Zurich.
    38. Edward P. Lazear, 2018. "Compensation and Incentives in the Workplace," Journal of Economic Perspectives, American Economic Association, vol. 32(3), pages 195-214, Summer.
    39. Jana Gallus, 2017. "Fostering Public Good Contributions with Symbolic Awards: A Large-Scale Natural Field Experiment at Wikipedia," Management Science, INFORMS, vol. 63(12), pages 3999-4015, December.
    40. Prendergast, Canice & Topel, Robert, 1993. "Discretion and bias in performance evaluation," European Economic Review, Elsevier, vol. 37(2-3), pages 355-365, April.
    41. Bruno S. Frey & Jana Gallus, 2017. "Towards An Economics Of Awards," Journal of Economic Surveys, Wiley Blackwell, vol. 31(1), pages 190-200, February.
    42. Chen, Yan & Li, Sherry Xin & Liu, Tracy Xiao & Shih, Margaret, 2014. "Which hat to wear? Impact of natural identities on coordination and cooperation," Games and Economic Behavior, Elsevier, vol. 84(C), pages 58-86.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gallus, Jana & Reiff, Joseph & Kamenica, Emir & Fiske, Alan Page, 2021. "Relational Incentives Theory," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, issue fothcomin.
    2. Brice Corgnet & Brian Gunia & Roberto Hernán González, 2021. "Harnessing the power of social incentives to curb shirking in teams," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 30(1), pages 139-167, February.
    3. Committee, Nobel Prize, 2016. "Oliver Hart and Bengt Holmström: Contract Theory," Nobel Prize in Economics documents 2016-1, Nobel Prize Committee.
    4. Eduard Marinov, 2016. "The 2016 Nobel Prize in Economics," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 97-149.
    5. Corgnet, Brice & Martin, Ludivine & Ndodjang, Peguy & Sutan, Angela, 2019. "On the merit of equal pay: Performance manipulation and incentive setting," European Economic Review, Elsevier, vol. 113(C), pages 23-45.
    6. Kirsten Bregn, 2013. "Detrimental Effects of Performance-Related Pay in the Public Sector? On the Need for a Broader Theoretical Perspective," Public Organization Review, Springer, vol. 13(1), pages 21-35, March.
    7. Fahn, Matthias, 2019. "Reciprocity in Dynamic Employment Relationships," Rationality and Competition Discussion Paper Series 198, CRC TRR 190 Rationality and Competition.
    8. Albanese, Marina & Navarra, Cecilia & Tortia, Ermanno C., 2015. "Employer moral hazard and wage rigidity. The case of worker owned and investor owned firms," International Review of Law and Economics, Elsevier, vol. 43(C), pages 227-237.
    9. Rebitzer, James B. & Taylor, Lowell J., 2011. "Extrinsic Rewards and Intrinsic Motives: Standard and Behavioral Approaches to Agency and Labor Markets," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 8, pages 701-772, Elsevier.
    10. Weng, Qian & Carlsson, Fredrik, 2015. "Cooperation in teams: The role of identity, punishment, and endowment distribution," Journal of Public Economics, Elsevier, vol. 126(C), pages 25-38.
    11. Dirk Sliwka, 2007. "Trust as a Signal of a Social Norm and the Hidden Costs of Incentive Schemes," American Economic Review, American Economic Association, vol. 97(3), pages 999-1012, June.
    12. MARTIN Ludivine, 2007. "The impact of technological changes on incentives and motivations to work hard," IRISS Working Paper Series 2007-15, IRISS at CEPS/INSTEAD.
    13. Joan Esteban & Laurence Kranich, 2003. "The Social Contracts with Endogenous Sentiments," Working Papers 71, Barcelona School of Economics.
    14. Bejarano, Hernán & Corgnet, Brice & Gómez-Miñambres, Joaquín, 2021. "Economic stability promotes gift-exchange in the workplace," Journal of Economic Behavior & Organization, Elsevier, vol. 187(C), pages 374-398.
    15. Bernard Baudry & Virgile Chassagnon, 2012. "The vertical network organization as a specific governance structure: what are the challenges for incomplete contracts theories and what are the theoretical implications for the boundaries of the (hub," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 16(2), pages 285-303, May.
    16. Josse Delfgaauw & Robert Dur & Oke Onemu & Joeri Sol, 2022. "Team Incentives, Social Cohesion, and Performance: A Natural Field Experiment," Management Science, INFORMS, vol. 68(1), pages 230-256, January.
    17. Rehse, Dominik & Tremöhlen, Felix, 2020. "Fostering participation in digital public health interventions: The case of digital contact tracing," ZEW Discussion Papers 20-076, ZEW - Leibniz Centre for European Economic Research.
    18. Neckermann, Susanne & Cueni, Reto & Frey, Bruno S., 2014. "Awards at work," Labour Economics, Elsevier, vol. 31(C), pages 205-217.
    19. Graham, John R. & Grennan, Jillian & Harvey, Campbell R. & Rajgopal, Shivaram, 2022. "Corporate culture: Evidence from the field," Journal of Financial Economics, Elsevier, vol. 146(2), pages 552-593.
    20. Morita, Hodaka & Servátka, Maroš, 2013. "Group identity and relation-specific investment: An experimental investigation," European Economic Review, Elsevier, vol. 58(C), pages 95-109.

    More about this item

    Keywords

    incentives; social relationships; relational models; congruence; incentive schemes;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • M5 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics
    • Z1 - Other Special Topics - - Cultural Economics

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:109898. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.