Higher Purpose, Incentives and Economic Performance

59 Pages Posted: 8 May 2019 Last revised: 30 Oct 2020

See all articles by Anjan V. Thakor

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business; European Corporate Governance Institute (ECGI)

Robert E. Quinn

University of Michigan, Stephen M. Ross School of Business

Date Written: May 28, 2020

Abstract

How does organizational higher purpose affect employee behavior and firm output? We develop an optimal-contracting model which shows that pursuing organizational higher purpose dissipates agency frictions, lowers wage costs and elicits higher employee effort. The effect on profits, however, depends on whether the authenticity of the firm’s higher purpose matters to employees or they care only about how much the firm invests in that purpose. When authenticity does not matter, the firm’s profit declines with its investment in higher purpose. But when authenticity matters, firm profit is non-monotonic in the commitment to higher purpose. The possibility of agency costs of external finance in some firms creates a negative externality, crowding out higher-purpose investments by other firms, with profits nonincreasing in higher-purpose investments cross-sectionally. When customers and/or investors care about the firm’s higher purpose, the equilibrium wages of employees decline and higher purpose investments by firms increase.

Keywords: Organizational performance, higher purpose, incentives, agency frictions

JEL Classification: D02, D21, D23, D64

Suggested Citation

Thakor, Anjan V. and Quinn, Robert E., Higher Purpose, Incentives and Economic Performance (May 28, 2020). European Corporate Governance Institute – Finance Working Paper 706/2020, Available at SSRN: https://ssrn.com/abstract=3350085 or http://dx.doi.org/10.2139/ssrn.3350085

Anjan V. Thakor (Contact Author)

Washington University, Saint Louis - John M. Olin School of Business ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Robert E. Quinn

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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