Work

Motivational investments and financial incentives

Year: 2025

Type: article

Abstract: ABSTRACT If firms can invest in the motivation of workers to undertake costly effort, how does that affect the choice of explicit financial incentives? 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 reduces the cost of effort. We refer to these as guilt and inspiration, respectively. We characterize the conditions under which motivational investments and financial incentives are substitutes and complements, and find that it depends on the type of the investment as well as whether the worker’s participation constraint is binding.

Source: The Journal of Law Economics and Organization

DOI: 10.1093/jleo/ewaf008

Authors: Maitreesh Ghatak, Zaki Wahhaj

Institutions: London School of Economics and Political Science, King's College London

Language: English

Topic: Experimental Behavioral Economics Studies

Subfield: Safety Research

Field: Social Sciences

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: hybrid

Estimated APC paid: $4,106