The Firm as an Intrinsic Motivation Device
37 Pages Posted: 6 Aug 2008 Last revised: 13 May 2014
Date Written: June 11, 2009
In this paper, we develop a new theory of the firm where the market is primarily an incentive system whereas the firm is an intrinsic motivation device. The firm is more efficient than the market when asset specificity and subjective risk are sufficiently high because it provides balanced incentives, fosters intrinsic motivation, and economizes on risk. An efficient firm is unambiguously the more ethical institution in the sense that the component of production effort due to intrinsic motivation and the agent's rents in exchange for commitment are higher. The exception is when the market approximates the first best.
Keywords: authority, endogenous preferences, incentives, intrinsic motivation, markets, multi-tasking, relational contracts, theory of the firm
JEL Classification: M14, M52, L14, D86, D02
Suggested Citation: Suggested Citation