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Goal Setting in the Principal-Agent Model: Weak Incentives for Strong Performance

Author

Listed:
  • Brice Corgnet

    (EM - EMLyon Business School, GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne - ENS de Lyon - École normale supérieure de Lyon - Université de Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet - Saint-Étienne - CNRS - Centre National de la Recherche Scientifique)

  • Joaquín Gómez-Miñambres

    (Chapman University, Bucknell University)

  • Roberto Hernán-Gonzalez

    (Nottingham University Business School [Nottingham])

Abstract

We study a principal-agent framework in which principals can assign wage-irrelevant goals to agents. We find evidence that, when given the possibility to set wage-irrelevant goals, principals select incentive contracts for which pay is less responsive to agents' performance. We show that average performance of agents is higher in the presence of goal setting than in its absence despite weaker incentives. We develop a principal-agent model with reference-dependent utility that illustrates how labor contracts combining weak monetary incentives and wage-irrelevant goals can be optimal. It follows that recognizing the pervasive use of non-monetary incentives in the workplace may help account for previous empirical findings suggesting that firms rely on unexpectedly weak monetary incentives.

Suggested Citation

  • Brice Corgnet & Joaquín Gómez-Miñambres & Roberto Hernán-Gonzalez, 2018. "Goal Setting in the Principal-Agent Model: Weak Incentives for Strong Performance," Post-Print halshs-01937633, HAL.
    • Handle: RePEc:hal:journl:halshs-01937633
    DOI: 10.1016/j.geb.2017.12.017
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    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • M54 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Management

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