Working Paper: CEPR ID: DP15172
Authors: Maitreesh Ghatak; Zaki Wahhaj
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.
Keywords: motivated agents; investment in worker motivation; job satisfaction; worker moral hazard
JEL Codes: D23; D86; D91; J33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Technological improvements (O33) | Increased reliance on financial incentives (G19) |
| Technological improvements (O33) | Decreased motivational investments (G11) |
| Guilt investments decrease (G11) | Reliance on financial incentives decreases (G40) |
| Cost of guilt investments decreases (G31) | Reliance on financial incentives decreases (G40) |
| Reduction in cost of guilt investments (G11) | Increase in use of esteem investments (G31) |
| Reduction in cost of one type of motivational investment (G11) | Increase in use of both types of motivational investments (G40) |
| Technological improvements (O33) | Increase in motivational investments (E22) |