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

Author

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  • Brice Corgnet

    (Economic Science Institute, Argyros School of Business and Economics)

  • Joaquin Gomez-Minambres

    (Bucknell University, Department of Economics,)

  • Roberto Hernan-Gonzalez

    (Business School, University of 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. Agents’ performance is higher in the presence of goal setting 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. 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 & Joaquin Gomez-Minambres & Roberto Hernan-Gonzalez, 2016. "Goal Setting in the Principal-Agent Model: Weak Incentives for Strong Performance," Discussion Papers 2016-09, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  • Handle: RePEc:not:notcdx:2016-09
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    2. Koch, Alexander K. & Nafziger, Julia, 2020. "Motivational goal bracketing: An experiment," Journal of Economic Theory, Elsevier, vol. 185(C).
    3. Damon Clark & David Gill & Victoria Prowse & Mark Rush, 2020. "Using Goals to Motivate College Students: Theory and Evidence From Field Experiments," The Review of Economics and Statistics, MIT Press, vol. 102(4), pages 648-663, October.
    4. Víctor González-Jiménez, 2021. "Incentive contracts when agents distort probabilities," Vienna Economics Papers vie2101, University of Vienna, Department of Economics.
    5. James Fan & Joaquín Gómez-Miñambres, 2020. "Nonbinding Goals in Teams: A Real Effort Coordination Experiment," Manufacturing & Service Operations Management, INFORMS, vol. 22(5), pages 1026-1044, September.
    6. Aleksandr Alekseev, 2022. "Give me a challenge or give me a raise," Experimental Economics, Springer;Economic Science Association, vol. 25(1), pages 170-202, February.
    7. Victor Gonzalez-Jimenez & Patricio S. Dalton & Charles N. Noussair, 2019. "The Dark Side of Monetary Bonuses: Theory and Experimental Evidence," Vienna Economics Papers vie1909, University of Vienna, Department of Economics.
    8. Argyro Avgoustaki & Almudena Cañibano, 2020. "Motivational Drivers of Extensive Work Effort: Are Long Hours Always Detrimental to Well‐being?," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 59(3), pages 355-398, July.
    9. Max van Lent & Michiel Souverijn, 2017. "Goal Setting and Raising the Bar: A Field Experiment," Tinbergen Institute Discussion Papers 17-001/VII, Tinbergen Institute.
    10. Buckley, P. & Roussillon, B. & Teyssier, S., 2021. "Gain and loss framing to encourage effort provision: An experiment," Working Papers 2021-02, Grenoble Applied Economics Laboratory (GAEL).
    11. James Fan & Joaquín Gómez‐Miñambres & Samuel Smithers, 2020. "Make it too difficult, and I'll give up; let me succeed, and I'll excel: The interaction between assigned and personal goals," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(6), pages 964-975, September.
    12. Víctor González-Jiménez, 2021. "Incentive contracts when agents distort probabilities," Vienna Economics Papers 2101, University of Vienna, Department of Economics.
    13. Brandts, Jordi & Corgnet, Brice & Hernán-González, Roberto & Ortiz, José Mª & Solà, Carles, 2021. "Watching or not watching? Access to information and the incentive effects of firing threats," Journal of Economic Behavior & Organization, Elsevier, vol. 189(C), pages 672-685.
    14. Sebastian Fest & Ola Kvaløy & Petra Nieken & Anja Schöttner, 2019. "Motivation and incentives in an online labor market," CESifo Working Paper Series 7526, CESifo.
    15. Robert Dibie & Raphael Dibie, 2020. "Analysis of the Determinants of Tax Policy Compliance in Nigeria," Journal of Public Administration and Governance, Macrothink Institute, vol. 10(2), pages 3462-3462, December.
    16. Victor Gonzalez-Jimenez & Patricio S. Dalton & Charles N. Noussair, 2019. "The Dark Side of Monetary Bonuses: Theory and Experimental Evidence," Vienna Economics Papers 1909, University of Vienna, Department of Economics.

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    More about this item

    Keywords

    Principal-agent models; incentive theory; non-monetary incentives; goal setting; reference-dependent utility; laboratory experiments.;
    All these keywords.

    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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