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Guilt, Esteem, and Motivational Investments

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  • Ghatak, Maitreesh
  • Wahhaj, Zaki

Abstract

What are the determinants of an organization's investment in the loyalty and motivation of its workers? We develop a simple principal-agent model where the standard optimal contract is to offer a bonus that trades off incentive provision versus rent extraction. We allow the principal to undertake two types of motivational investments - one that increases the agent's disutility from deviating from a prescribed effort level, and another that increases the agent's on-the-job satisfaction. We argue that these two types of investments can capture a range of organizational practices - other than extrinsic rewards - that aim to raise worker motivation. We show that the two types of motivational investments are complements and both are substitutes to financial incentives. Our analysis implies that technological improvements in the form of improved worker productivity or greater observability of output will induce profit-maximizing firms to make greater use of financial incentives and less use of motivational investments. The reason is that while financial incentives have constant returns in terms of its effect on the worker's effort level, motivational investments by their very nature have decreasing returns.

Suggested Citation

  • Ghatak, Maitreesh & Wahhaj, Zaki, 2020. "Guilt, Esteem, and Motivational Investments," CEPR Discussion Papers 15172, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:15172
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    References listed on IDEAS

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    More about this item

    Keywords

    investment in worker motivation; Job Satisfaction; Motivated agents; worker moral hazard;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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