Awards - the Neglected Incentives

Abstract

The standard principal agent model considers monetary incentives only. It is assumed that money is more efficient than other forms of material, non-monetary compensation. Awards in the form of titles, orders, medals and honors (prizes) - though almost omnipresent - have so far escaped the attention of economists. They present extrinsic, non-monetary incentives that operate through the innate desire of human beings for recognition and status. In this paper, we analyze the differences between monetary incentives and awards: in general, awards are cheap, lead to interpersonal relationships, are not directly related to performance and have a signaling value. In addition, they support intrinsic motivation, may increase social welfare and are exempt from taxation. Awards present an important additional instrument to be considered in principal agent theory. In many contexts they are superior to monetary compensation.

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Keywords: incentives, motivation, non-monetary compensation, awards, orders

JEL Classification: A13, D02, D23, H23, J33, M52