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Power of Incentives in Public Organizations When Employees Are Intrinsically Motivated

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  • Erik Canton

Abstract

This paper studies the power of incentives in public organizations when some employees are intrinsically motivated to deliver the socially desirable outcome, while others are only driven by extrinsic incentives. To alleviate agency problems, the standard moral-hazard model suggests the use of instruments such as performance pay. This intervention might interact with intrinsic motivation. I introduce intrinsic motivation into the standard multiple-task moral-hazard model, and identify conditions under which extrinsic incentives lead to crowding in or crowding out of intrinsic motivation. The optimal reward structure shifts away from the use of monetary incentives when more employees are intrinsically motivated.

Suggested Citation

  • Erik Canton, 2005. "Power of Incentives in Public Organizations When Employees Are Intrinsically Motivated," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 161(4), pages 664-680, December.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200512)161:4_664:poiipo_2.0.tx_2-9
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    References listed on IDEAS

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    Cited by:

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    2. Martina de Gramatica & Fabio Massacci & Woohyun Shim & Uğur Turhan & Julian Williams, 2017. "Agency Problems and Airport Security: Quantitative and Qualitative Evidence on the Impact of Security Training," Risk Analysis, John Wiley & Sons, vol. 37(2), pages 372-395, February.
    3. Pierre Koning & J. Vyrastekova & S. Onderstal, 2006. "Team incentives in public organisations; an experimental study," CPB Discussion Paper 60, CPB Netherlands Bureau for Economic Policy Analysis.
    4. Antonio Sánchez Soliño, 2019. "Sustainability of Public Services: Is Outsourcing the Answer?," Sustainability, MDPI, vol. 11(24), pages 1-12, December.
    5. Canoy Marcel & Veld Daan L. in ’t, 2014. "How to Boost the Production of Free Services: In Search of the Holy Referee Grail," Man and the Economy, De Gruyter, vol. 1(1), pages 79-92, June.
    6. Canton Erik, 2023. "A Social Contract for the New Growth Agenda: The Role of Trust," Intereconomics: Review of European Economic Policy, Sciendo, vol. 58(5), pages 240-244, September.
    7. Jana Vyrastekova & Sander Onderstal & Pierre Koning, 2012. "Self-selection and the power of incentive schemes: an experimental study," Applied Economics, Taylor & Francis Journals, vol. 44(32), pages 4211-4219, November.
    8. Donze, Jocelyn & Gunnes, Trude, 2018. "Becoming “We” instead of “I”, identity management and incentives in the workplace," Journal of Economic Behavior & Organization, Elsevier, vol. 148(C), pages 105-120.
    9. Manoj M. & V. G. Sabu, 2020. "Towards Agile Public Sector: Analysing the Effects of IM and EM on WP," Management and Labour Studies, XLRI Jamshedpur, School of Business Management & Human Resources, vol. 45(3), pages 295-316, August.
    10. Trude Gunnes, 2021. "Norms and financial incentives: A model of how to fund universities," Review of Economics and Institutions, Università di Perugia, vol. 12(1).
    11. Echeverría, Manuel, 2012. "Value Oriented Organizations with Value Neutral Hierarchies," Working Papers 2012:25, Lund University, Department of Economics.
    12. Lamantia, Fabio & Pezzino, Mario, 2016. "Evolutionary efficacy of a Pay for Performance scheme with motivated agents," Journal of Economic Behavior & Organization, Elsevier, vol. 125(C), pages 107-119.
    13. Patrick Francois, 2007. "Making a difference," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 714-732, September.
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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