Why Does the Introduction of Monetary Compensation Produce a Reduction in Performance?

20 Pages Posted: 31 Dec 2003

See all articles by Harvey S. James, Jr.

Harvey S. James, Jr.

University of Missouri at Columbia - Division of Applied Social Sciences

Date Written: March 2003

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.

Keywords: Principal-agent problem, incentive compensation, intrinsic motivation, motivational

JEL Classification: D64, J33, L22

Suggested Citation

James, Harvey S., Why Does the Introduction of Monetary Compensation Produce a Reduction in Performance? (March 2003). Available at SSRN: https://ssrn.com/abstract=481942 or http://dx.doi.org/10.2139/ssrn.481942

Harvey S. James (Contact Author)

University of Missouri at Columbia - Division of Applied Social Sciences ( email )

Columbia, MO
United States
573-884-9682 (Phone)

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