Crowding-Out of Intrinsic Motivation - Opening the Black Box

Abstract

There is a controversy about the finding that performance-contingent rewards undermine intrinsic motivation. While standard economics states that pay-for-performance increases work efforts, psychological economics counter that it sometimes weakens work efforts. We show both predictions are valid in a job-related environment. Based on a meta-analysis and a vignette study we find a) performance-contingent pay strengthens extrinsic motivation, i.e., elicits a price effect; simultaneously b) performance contingent pay weakens intrinsic motivation, i.e., provokes a crowding-out effect. We disaggregate the net result of both effects contingent on the nature of the task. We show: pay-for-performance always produces hidden costs of rewards.

Keywords: motivation, pay for performance, crowding-out, price effect, meta-analysis, vignette study

JEL Classification: J33, D23, M52