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Why Does The Introduction of Monetary Compensation Produce A Reduction In Performance?

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  • Harvey S. James Jr.

    (University of Missouri)

Abstract

According to empirical evidence, extrinsic incentives often crowd out intrinsic motivation, thus reducing the effort choices of workers. This article presents a simple model illustrating how the introduction of monetary incentives causes a discontinuous reduction in worker effort as well as a reduction in worker motivation to act in the interest of a principal. The primary finding is that motivation crowding out occurs when then the object of an agent's intrinsic motivation is a principal who is also the source of the extrinsic compensation the agent receives. When intrinsic satisfaction is directed at more generalized social norms of behavior, however, extrinsic rewards will not crowd out intrinsic motivation.

Suggested Citation

  • Harvey S. James Jr., 2003. "Why Does The Introduction of Monetary Compensation Produce A Reduction In Performance?," Microeconomics 0303005, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpmi:0303005
    Note: Type of Document - Microsoft Word 2000; prepared on IBM PC ; to print on HP; pages: 21; figures: included
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Principal-agent problem; incentive compensation; intrinsic motivation; motivation crowding out;
    All these keywords.

    JEL classification:

    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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