Avoiding the crowding-out of prosocial motivation in microfinance

While financial incentives may increase extrinsic staff motivation, they may also have a negative effect on prosocial motivation, as highlighted by the motivation crowding-out theory. The threshold at which monetary rewards induce this crowding-out effect remains unknown. The aim of this paper is to determine, with a mathematical model, an optimal incentive scheme that microfinance institutions may use to increase staff members’ financial performance while preserving their prosocial motivation and thus avoiding the crowding-out effect. The results show that the amount of the monetary reward should be sufficiently high in order to maintain microfinance loan officers’ prosocial motivation. However, offering such large monetary rewards will result in higher operating expenses that MFIs will probably pass on to clients through a higher interest rate, which may jeopardize their social mission.