DP15172 Guilt, Esteem, and Motivational Investments

Author(s): Maitreesh Ghatak, Zaki Wahhaj
Publication Date: August 2020
Date Revised: August 2020
Keyword(s): investment in worker motivation, Job Satisfaction, Motivated agents, worker moral hazard
JEL(s): D23, D86, D91, J33
Programme Areas: Public Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15172

What are the determinants of an organization's investment in the loyalty and motivation of its workers? We develop a simple principal-agent model where the standard optimal contract is to offer a bonus that trades off incentive provision versus rent extraction. We allow the principal to undertake two types of motivational investments - one that increases the agent's disutility from deviating from a prescribed effort level, and another that increases the agent's on-the-job satisfaction. We argue that these two types of investments can capture a range of organizational practices - other than extrinsic rewards - that aim to raise worker motivation. We show that the two types of motivational investments are complements and both are substitutes to financial incentives. Our analysis implies that technological improvements in the form of improved worker productivity or greater observability of output will induce profit-maximizing firms to make greater use of financial incentives and less use of motivational investments. The reason is that while financial incentives have constant returns in terms of its effect on the worker's effort level, motivational investments by their very nature have decreasing returns.