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Policy consequences of pay-for-performance and crowding-out

Author

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  • Bruno Frey

    () (University of Basel, Switzerland
    Centre for Research in Economics, Management and the Arts (CREMA), Switzerland)

Abstract

Crowding Theory is part of Behavioral Economics; it takes into account that human beings are motivated by both extrinsic and intrinsic motivation. In contrast, pay-for-performance intends to raise performance by making compensation dependent on the performance determined ex ante by relying on extrinsic motivation. Yet, empirical evidence demonstrates that pay-for-performance under identifiable conditions leads to undesired worker performance. As a policy consequence, the government in the public sector, as well as charitable and humanitarian organizations relying on volunteers, should be very careful to institute pay-for-performance schemes due to the risk of crowding-out intrinsic motivation. Using pay-for-performance in such activities is in most cases incompatible and inconsistent with the organizations' goals and tends to lead to poor or at least unsatisfactory work activities.

Suggested Citation

  • Bruno Frey, 2017. "Policy consequences of pay-for-performance and crowding-out," Journal of Behavioral Economics for Policy, Society for the Advancement of Behavioral Economics (SABE), vol. 1(1), pages 55-59, February.
  • Handle: RePEc:beh:jbepv1:v:1:y:2017:i:1:p:55-59
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    References listed on IDEAS

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    1. Frey, Bruno S, 1992. "Tertium Datur: Pricing, Regulating and Intrinsic Motivation," Kyklos, Wiley Blackwell, vol. 45(2), pages 161-184.
    2. Roland Bénabou & Jean Tirole, 2003. "Intrinsic and Extrinsic Motivation," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 489-520.
    3. Jean Tirole & Roland Bénabou, 2006. "Incentives and Prosocial Behavior," American Economic Review, American Economic Association, vol. 96(5), pages 1652-1678, December.
    4. Uri Gneezy & Aldo Rustichini, 2000. "Pay Enough or Don't Pay at All," The Quarterly Journal of Economics, Oxford University Press, vol. 115(3), pages 791-810.
    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 746-755, September.
    6. Michael Kosfeld & Armin Falk, 2006. "The Hidden Costs of Control," American Economic Review, American Economic Association, vol. 96(5), pages 1611-1630, December.
    7. Bruno S. Frey & Fabian Homberg & Margit Osterloh, 2013. "Organizational Control Systems and Pay-for-Performance in the Public Service," CREMA Working Paper Series 2013-11, Center for Research in Economics, Management and the Arts (CREMA).
    8. Besley, Timothy, 2007. "Principled Agents?: The Political Economy of Good Government," OUP Catalogue, Oxford University Press, number 9780199283910.
    9. repec:cup:apsrev:v:95:y:2001:i:01:p:131-144_00 is not listed on IDEAS
    10. Barkema, Harry G, 1995. "Do Top Managers Work Harder When They Are Monitored?," Kyklos, Wiley Blackwell, vol. 48(1), pages 19-42.
    11. Chan, Ho Fai & Frey, Bruno S. & Gallus, Jana & Torgler, Benno, 2014. "Academic honors and performance," Labour Economics, Elsevier, vol. 31(C), pages 188-204.
    12. Bohnet, Iris & Frey, Bruno S. & Huck, Steffen, 2001. "More Order with Less Law: On Contract Enforcement, Trust, and Crowding," American Political Science Review, Cambridge University Press, vol. 95(01), pages 131-144, March.
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    More about this item

    Keywords

    crowding-out; pay-for-performance; intrinsic motivation; extrinsic motivation; anomalies;

    JEL classification:

    • D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J48 - Labor and Demographic Economics - - Particular Labor Markets - - - Particular Labor Markets; Public Policy
    • L3 - Industrial Organization - - Nonprofit Organizations and Public Enterprise

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