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The Effect of External Incentives on Profits and Firm-Provided Incentives Strategy

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Author Info
Azar, Ofer H.

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Abstract

The article examines the firm's choice of incentives when workers face additional incentives (“external incentives”) to those provided by the firm, such as building reputation that improves the workers' prospects with other employers, or satisfaction from working well. Surprisingly, the firm might find it optimal to increase the incentives it provides following an increase in external incentives. Even if the firm reduces its incentives, however, total incentives unambiguously increase, leading to higher effort and profits. This implies that firms should try to increase the external incentives that their workers face; I suggest several ways firms can do so.

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File URL: http://mpra.ub.uni-muenchen.de/4456/
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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 4456.

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Date of creation: 2003
Date of revision: 2007
Handle: RePEc:pra:mprapa:4456

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Related research
Keywords: Worker satisfaction Personnel economics External incentives Worker reputation Intrinsic motivation

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Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
M20 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - General

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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.:
  1. Barron, John M & Gjerde, Kathy Paulson, 1997. "Peer Pressure in an Agency Relationship," Journal of Labor Economics, University of Chicago Press, vol. 15(2), pages 234-54, April. [Downloadable!] (restricted)
  2. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January. [Downloadable!] (restricted)
  3. Kandel, Eugene & Lazear, Edward P, 1992. "Peer Pressure and Partnerships," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 801-17, August. [Downloadable!] (restricted)
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  4. Mookherjee, Dilip, 1984. "Optimal Incentive Schemes with Many Agents," Review of Economic Studies, Blackwell Publishing, vol. 51(3), pages 433-46, July. [Downloadable!] (restricted)
  5. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn. [Downloadable!] (restricted)
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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. Azar, Ofer H., 2005. "Incentives and Service Quality in the Restaurant Industry: The Tipping – Service Puzzle," MPRA Paper 4457, University Library of Munich, Germany, revised 2006. [Downloadable!]
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