On the Hidden Costs of Incentive Schemes

41 Pages Posted: 19 Aug 2003

See all articles by Dirk Sliwka

Dirk Sliwka

University of Cologne - Department of Business Administration and Human Resource Management; IZA Institute of Labor Economics

Date Written: August 2003

Abstract

By enriching a principal-agent model it is shown that the introduction of monetary incentives may reduce an agent's motivation. In a first step, we allow for the possibility that some agents stick to unverifiable agreements. The larger the fraction of reliable agents, the lower powered will then be the optimal incentive scheme and fixed wages become optimal when performance measurement is costly. If social norms matter such that some agents' reliability is influenced by their beliefs on the convictions of others, high powered incentives signal that not sticking to agreements is a widespread behavior and may lead to lower effort levels. crowding-out, honesty

Keywords: incentives, intrinsic motivation, motivation

JEL Classification: M52, J33, D23

Suggested Citation

Sliwka, Dirk, On the Hidden Costs of Incentive Schemes (August 2003). IZA Discussion Paper No. 844. Available at SSRN: https://ssrn.com/abstract=435200

Dirk Sliwka (Contact Author)

University of Cologne - Department of Business Administration and Human Resource Management ( email )

Koln, 50923
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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