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Performance targets, effort and risk-taking

  • Rablen, Matthew D.

Growing economic and psychological evidence documents effects of target setting on levels of effort and risk-taking, even in the absence of a monetary reward for attaining the target. I explore a principal-agent environment in which the principal sets the agent a performance target, and the agent's intrinsic motivation to work is influenced by their performance relative to the target. When the agent has prospect theory preferences relative to the target I show that a performance target can induce greater effort, but, when set too high, it eventually induces lower effort. Also, the agent's preferences for risk-taking hinge on whether the target is set above or below expected output. I find that the principal's optimal target exceeds expected output.

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Article provided by Elsevier in its journal Journal of Economic Psychology.

Volume (Year): 31 (2010)
Issue (Month): 4 (August)
Pages: 687-697

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Handle: RePEc:eee:joepsy:v:31:y:2010:i:4:p:687-697
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