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Psychological Foundations of IncentivesErnst FehrUniversity of Zurich - Department of Economics Armin FalkInstitute for the Study of Labor (IZA); University of Bonn - Economic Science Area; CESifo (Center for Economic Studies and Ifo Institute for Economic Research) May 2002 IZA Discussion Paper No. 507; CESifo Working Paper Series No. 714; Zurich IEER Working Paper No. 95 Abstract: During the last two decades economists have made much progress in understanding incentives, contracts and organisations. Yet, they constrained their attention to a very narrow and empirically questionable view of human motivation. The purpose of this paper is to show that this narrow view of human motivation may severely limit understanding the determinants and effects of incentives. Economists may fail to understand the levels and the changes in behaviour if they neglect motives like the desire to reciprocate or the desire to avoid social disapproval. We show that monetary incentives may backfire and reduce the performance of agents or their compliance with rules. In addition, these motives may generate very powerful incentives themselves.
Number of Pages in PDF File: 54 Keywords: Incentives, Contracts, Reciprocity, Social Approval, Social Norms, Intrinsic Motivation JEL Classification: J41, C91, D64 working papers seriesDate posted: December 17, 2001Suggested CitationContact Information
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