Why Does The Introduction of Monetary Compensation Produce A Reduction In Performance?
AbstractAccording to empirical evidence, extrinsic incentives often crowd out intrinsic motivation, thus reducing the effort choices of workers. This article presents a simple model illustrating how the introduction of monetary incentives causes a discontinuous reduction in worker effort as well as a reduction in worker motivation to act in the interest of a principal. The primary finding is that motivation crowding out occurs when then the object of an agent's intrinsic motivation is a principal who is also the source of the extrinsic compensation the agent receives. When intrinsic satisfaction is directed at more generalized social norms of behavior, however, extrinsic rewards will not crowd out intrinsic motivation.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by EconWPA in its series Microeconomics with number 0303005.
Length: 21 pages
Date of creation: 12 Mar 2003
Date of revision:
Note: Type of Document - Microsoft Word 2000; prepared on IBM PC ; to print on HP; pages: 21; figures: included
Contact details of provider:
Web page: http://18.104.22.168
Principal-agent problem; incentive compensation; intrinsic motivation; motivation crowding out;
Find related papers by JEL classification:
- D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
- L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-03-19 (All new papers)
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.:
- Fehr, Ernst & Gächter, Simon, 2001.
"Do Incentive Contracts Crowd Out Voluntary Cooperation?,"
CEPR Discussion Papers
3017, C.E.P.R. Discussion Papers.
- Ernst Fehr & Simon Gaechter, . "Do Incentive Contracts Crowd out Voluntary Cooperation?," IEW - Working Papers 034, Institute for Empirical Research in Economics - University of Zurich.
- Frey, Bruno S & Oberholzer-Gee, Felix, 1997. "The Cost of Price Incentives: An Empirical Analysis of Motivation Crowding-Out," American Economic Review, American Economic Association, vol. 87(4), pages 746-55, September.
- Frey, Bruno S, 1993. "Does Monitoring Increase Work Effort? The Rivalry with Trust and Loyalty," Economic Inquiry, Western Economic Association International, vol. 31(4), pages 663-70, October.
- Ernst Fehr & Simon G�chter, 2000.
"Fairness and Retaliation: The Economics of Reciprocity,"
Journal of Economic Perspectives,
American Economic Association, vol. 14(3), pages 159-181, Summer.
- Ernst Fehr & Simon Gaechter, . "Fairness and Retaliation: The Economics of Reciprocitys," IEW - Working Papers 040, Institute for Empirical Research in Economics - University of Zurich.
- Ernst Fehr & Simon Gaechter, 2000. "Fairness and Retaliation: The Economics of Reciprocity," CESifo Working Paper Series 336, CESifo Group Munich.
- Gneezy, U. & Rustichini, A., 1998.
"Pay Enough - Or Don't Pay at All,"
1998-57, Tilburg University, Center for Economic Research.
- Frey, Bruno S & Jegen, Reto, 2001. " Motivation Crowding Theory," Journal of Economic Surveys, Wiley Blackwell, vol. 15(5), pages 589-611, December.
- Kreps, David M, 1997. "Intrinsic Motivation and Extrinsic Incentives," American Economic Review, American Economic Association, vol. 87(2), pages 359-64, May.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).
If references are entirely missing, you can add them using this form.