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Why Does The Introduction of Monetary Compensation Produce A Reduction In Performance?

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  • Harvey S. James Jr.

    (University of Missouri)

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    Abstract

    According 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.

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    Bibliographic Info

    Paper provided by EconWPA in its series Microeconomics with number 0303005.

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    Length: 21 pages
    Date of creation: 12 Mar 2003
    Date of revision:
    Handle: RePEc:wpa:wuwpmi:0303005

    Note: Type of Document - Microsoft Word 2000; prepared on IBM PC ; to print on HP; pages: 21; figures: included
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    Web page: http://128.118.178.162

    Related research

    Keywords: Principal-agent problem; incentive compensation; intrinsic motivation; motivation crowding out;

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    1. Gneezy, U. & Rustichini, A., 1998. "Pay Enough - Or Don't Pay at All," Discussion Paper, Tilburg University, Center for Economic Research 1998-57, Tilburg University, Center for Economic Research.
    2. Ernst Fehr & Simon Gaechter, 2000. "Fairness and Retaliation: The Economics of Reciprocity," CESifo Working Paper Series 336, CESifo Group Munich.
    3. Frey, Bruno S & Jegen, Reto, 2001. " Motivation Crowding Theory," Journal of Economic Surveys, Wiley Blackwell, vol. 15(5), pages 589-611, December.
    4. Fehr, Ernst & Gächter, Simon, 2001. "Do Incentive Contracts Crowd Out Voluntary Cooperation?," CEPR Discussion Papers 3017, C.E.P.R. Discussion Papers.
    5. 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.
    6. Kreps, David M, 1997. "Intrinsic Motivation and Extrinsic Incentives," American Economic Review, American Economic Association, vol. 87(2), pages 359-64, May.
    7. 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.
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