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Too Motivated?

  • Van den Steen, Eric

I show that an agent's motivation to do well (objectively) may be unambiguously bad in a world with differing priors, i.e., when people openly disagree on the optimal course of action. The reason is that an agent who is strongly motivated is more likely to follow his own view of what should be done. As a result, the agent is more willing to disobey his principal's orders when the two of them disagree on the right course of action. This effect has a number of implications. First of all, agents who are subject to authority will have low-powered incentive pay. Second, intrinsically motivated agents will be more likely to disobey and less likely to be subject to authority. Firms with intrinsically motivated agents will need to rely on other methods than authority for coordination. Moreover, an increase in intrinsic motivation may decrease all players' expected utility, so that it may be optimal for a firm to look for employees with low intrinsic motivation. Finally, subjective performance pay may be optimal, even when the true outcome of the project is perfectly measurable and contractible. Through this analysis, the paper identifies an important difference between differing priors and private benefits (or private information): with differing priors, pay-for-performance can create agency problems rather than solving them.

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File URL: http://hdl.handle.net/1721.1/18180
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Paper provided by Massachusetts Institute of Technology (MIT), Sloan School of Management in its series Working papers with number 18180.

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Date of creation: 08 Jul 2005
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Handle: RePEc:mit:sloanp:18180
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  1. Morris, Stephen, 1995. "The Common Prior Assumption in Economic Theory," Economics and Philosophy, Cambridge University Press, vol. 11(02), pages 227-253, October.
  2. Eric Van den Steen, 2010. "Culture Clash: The Costs and Benefits of Homogeneity," Management Science, INFORMS, vol. 56(10), pages 1718-1738, October.
  3. Nicholas Barberis & Richard Thaler, 2002. "A Survey of Behavioral Finance," NBER Working Papers 9222, National Bureau of Economic Research, Inc.
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  7. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Scholarly Articles 4554125, Harvard University Department of Economics.
  8. Landier, Augustin & Thesmar, David, 2003. "Financial Contracting with Optimistic Entrepreneurs: Theory and Evidence," CEPR Discussion Papers 3971, C.E.P.R. Discussion Papers.
  9. Drew Fudenberg & Jean Tirole, 1988. "Moral Hazard and Renegotiation in Agency Contracts," Working papers 494, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. John C. Harsanyi, 1968. "Games with Incomplete Information Played by `Bayesian' Players, Part III. The Basic Probability Distribution of the Game," Management Science, INFORMS, vol. 14(7), pages 486-502, March.
  11. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  12. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
  13. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-80, March.
  14. Martin, Robert E, 1988. "Franchising and Risk Management," American Economic Review, American Economic Association, vol. 78(5), pages 954-68, December.
  15. Patrick Legros & Andrew Newman, 2002. "Courts, contracts and interference," ULB Institutional Repository 2013/7034, ULB -- Universite Libre de Bruxelles.
  16. Anton Suvorov & Jeroen van de Ven, 2006. "Discretionary Bonuses as a Feedback Mechanism," Working Papers w0088, Center for Economic and Financial Research (CEFIR).
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