Higher Purpose, Incentives and Economic Performance
24 Pages Posted: 8 May 2019
Date Written: April 8, 2019
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: Suggested Citation