Higher Purpose, Incentives and Economic Performance

24 Pages Posted: 8 May 2019

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: April 8, 2019

Abstract

This paper theoretically analyzes how organizational higher purpose motivates employees. We begin with anecdotes derived from interviews-based research that illustrate the stylized facts, and discuss the related empirical evidence. A simple model is developed that captures these stylized facts. It shows that organizational higher purpose dissipates agency frictions and motivates employees to work harder. Nonetheless, embracing a higher purpose always leads to lower tangible economic output (e.g., profits) in the base model. We show in an extension that when the utility derived by the employee from purpose is positively associated with the utility derived from it by the leader, tangible economic output is non-monotonic in the commitment to higher purpose, first increasing in this commitment and then decreasing. Thus, maximizing economic output requires an intermediate commitment to higher purpose. With external financing, the possibility of personal consumption by the owner-managers of some firms crowds out higher-purpose investments by other firms, and profits are non-increasing in higher-purpose investments cross-sectionally.

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 (April 8, 2019). 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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