Too Motivated?

27 Pages Posted: 20 Jun 2005  

Eric Van den Steen

Harvard Business School - Strategy Unit

Date Written: June 2005

Abstract

I show that an agent's motivation to do well (objectively) may be unambiguously bad in a world with differing priors, i.e., when people openly disagree on the optimal course of action. The reason is that an agent who is strongly motivated is more likely to follow his own view of what should be done. As a result, the agent is more willing to disobey his principal's orders when the two of them disagree on the right course of action.

This effect has a number of implications. First of all, agents who are subject to authority will have low-powered incentive pay. Second, intrinsically motivated agents will be more likely to disobey and less likely to be subject to authority. Firms with intrinsically motivated agents will need to rely on other methods than authority for coordination. Moreover, an increase in intrinsic motivation may decrease all players' expected utility, so that it may be optimal for a firm to look for employees with low intrinsic motivation. Finally, subjective performance pay may be optimal, even when the true outcome of the project is perfectly measurable and contractible.

Through this analysis, the paper identifies an important difference between differing priors and private benefits (or private information): with differing priors, pay-for-performance can create agency problems rather than solving them.

Keywords: differing priors, low-powered incentives, intrinsic motivation, authority, subjective evaluation

JEL Classification: D81, J3, L22, M12, M52

Suggested Citation

Van den Steen, Eric, Too Motivated? (June 2005). MIT Sloan Working Paper No. 4547-05. Available at SSRN: https://ssrn.com/abstract=746765 or http://dx.doi.org/10.2139/ssrn.746765

Eric Van den Steen (Contact Author)

Harvard Business School - Strategy Unit ( email )

Harvard Business School
Soldiers Field Road
Boston, MA 02163
United States

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