Social Norms and Incentive Contract Design
54 Pages Posted: 27 May 2012 Last revised: 17 Aug 2018
Date Written: June 15, 2018
We develop a model to investigate how social norms influence a manager’s desired actions (supply of effort) and undesired actions (unproductive activities that are costly to firm owners). Specifically, when a manager has a strong preference to conform to the behavior of other managers, we predict that the firm will adjust contract design choices related to incentive strength and performance measurement. Empirically we draw on the notion of an organization’s work climate to capture managers’ preferences to conform to social norms. Using data collected from a sample of 557 managers we find that in a work climate where the prevailing norm is defined as what is right for oneself, firms have weaker incentives and place a greater weight on aggregate performance measures. In addition, respondents report to engage more in undesirable actions. In contrast, when the social norm highlights how actions impact on others, firms place lower weights on aggregate performance measures. At the same time, respondents report that they supply more effort and engage less in undesirable actions.
Keywords: incentive contract; performance measures; social norms; unproductive actions; work climate
JEL Classification: M41
Suggested Citation: Suggested Citation