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On the Hidden Costs of Incentive Schemes

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Listed author(s):
  • Sliwka, Dirk

    ()

    (University of Cologne)

Abstract

By enriching a principal-agent model it is shown that the introduction of monetary incentives may reduce an agent’s motivation. In a first step, we allow for the possibility that some agents stick to unverifiable agreements. The larger the fraction of reliable agents, the lower powered will then be the optimal incentive scheme and fixed wages become optimal when performance measurement is costly. If social norms matter such that some agents’ reliability is influenced by their beliefs on the convictions of others, high powered incentives signal that not sticking to agreements is a widespread behavior and may lead to lower effort levels.

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File URL: http://ftp.iza.org/dp844.pdf
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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 844.

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Length: 41 pages
Date of creation: Aug 2003
Handle: RePEc:iza:izadps:dp844
Contact details of provider: Postal:
IZA, P.O. Box 7240, D-53072 Bonn, Germany

Phone: +49 228 3894 223
Fax: +49 228 3894 180
Web page: http://www.iza.org

Order Information: Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany
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Keywords: incentives; motivation crowding-out; intrinsic motivation; honesty;

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Find related papers by JEL classification:
  • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
  • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
  • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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