Discussion paper

DP15723 Efficiency Wages with Motivated Agents

Many jobs are connected to a social purpose, i.e., they have a positive impact on society beyond profit-maximization. This paper uses a modified principal-agent gift-exchange game with positive externality in the form of a charitable donation (prosocial treatment) to study how workers' prosocial motivation interacts with the use of efficiency wages in stimulating effort. We find that, compared to a standard gift-exchange game (GE treatment), the presence of the externality shifts the agents' effort choice function upwards without affecting its slope. This means that prosocial motivation and efficiency wages are independent in stimulating effort and, thus, that if principals were profit-maximizers, wage offers should be the same in both treatments. However, principals offer higher wages in the prosocial treatment. We show that this is due to principals in the GE treatment highly underestimating agents' reciprocity and thereby offering wages below the profit-maximizing level. The results from robustness-checks further suggest that our findings are unlikely to be driven by a simple efficiency effect; instead they appear to be driven by the presence of the externality, irrespective of the specific third-party benefiting from it.


Armouti-Hansen, J, L Cassar, A Dereky and F Engl (2021), ‘DP15723 Efficiency Wages with Motivated Agents‘, CEPR Discussion Paper No. 15723. CEPR Press, Paris & London. https://cepr.org/publications/dp15723