Goal Setting and Monetary Incentives: When Large Stakes Are Not Enough

The aim of this paper is to test the effectiveness of wage-irrelevant goal setting policies in a laboratory environment. In our design, managers can assign a goal to their workers by setting a certain level of performance on the work task.We establish our heoretical conjectures by developing a model where assigned goals act as reference points to workers’ intrinsic motivation. Consistent with our model,we find that managers set goals which are challenging but attainable for an average-ability worker. Workers respond to these goals by increasing effort, performance and by decreasing on-the-job leisure activities with respect to the no-goal setting baseline. Finally, we study the interaction between goal setting and monetary rewards and find that goal setting is most effective when monetary incentives are strong. These results suggestthat goal setting may produceintrinsic motivation and increas eworkers’performance beyond what is achieved using solely monetary incentives.