Effect of External Incentives on Profits and Firm-Provided Incentives Strategy

15 Pages Posted: 25 Jun 2007

See all articles by Ofer H. Azar

Ofer H. Azar

Ben-Gurion University of the Negev - Guilford Glazer Faculty of Business and Management

Abstract

The article examines the firm's choice of incentives when workers face additional incentives (external incentives) to those provided by the firm, such as building reputation that improves the workers' prospects with other employers, or satisfaction from working well. Surprisingly, the firm might find it optimal to increase the incentives it provides following an increase in external incentives. Even if the firm reduces its incentives, however, total incentives unambiguously increase, leading to higher effort and profits. This implies that firms should try to increase the external incentives that their workers face; I suggest several ways firms can do so.

Keywords: Worker satisfaction, Personnel economics, External incentives, Worker reputation, Intrinsic motivation

JEL Classification: M52, M20, L20, J30, D21

Suggested Citation

Azar, Ofer H., Effect of External Incentives on Profits and Firm-Provided Incentives Strategy. Journal of Socio-Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=996345

Ofer H. Azar (Contact Author)

Ben-Gurion University of the Negev - Guilford Glazer Faculty of Business and Management ( email )

P.O. Box 653
Beer-Sheva, 84105
Israel
+972 8 6472675 (Phone)
+972 8 6477691 (Fax)

HOME PAGE: http://www.oferazar.com

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