Goal Setting in the Principal-Agent Model: Weak Incentives for Strong Performance

GATE WP 1628 – September 2016

36 Pages Posted: 12 Sep 2016

See all articles by Brice Corgnet

Brice Corgnet

University of Saint Etienne - Analysis Group and Economic Theory Lyon St-Etienne (GATE-LSE)

Joaquín Gómez-Miñambres

Chapman University - The George L. Argyros School of Business & Economics

Roberto Hernan Gonzalez

Université de Bourgogne - Burgundy School of Business; University of Granada

Date Written: September 12, 2016

Abstract

We study a principal-agent framework in which principals can assign wage-irrelevant goals to agents. We find evidence that, when given the possibility to set wage-irrelevant goals, principals select incentive contracts for which pay is less responsive to agents’ performance. We show that average performance of agents is higher in the presence of goal setting than in its absence despite weaker incentives. We develop a principal-agent model with reference-dependent utility that illustrates how labor contracts combining weak monetary incentives and wage-irrelevant goals can be optimal. It follows that recognizing the pervasive use of non-monetary incentives in the workplace may help account for previous empirical findings suggesting that firms rely on unexpectedly weak monetary incentives.

Keywords: Principal-agent models, incentive theory, non-monetary incentives, goal setting, reference-dependent utility, laboratory experiments.

JEL Classification: C92, D23, M54

Suggested Citation

Corgnet, Brice and Gómez-Miñambres, Joaquín and Hernan Gonzalez, Roberto, Goal Setting in the Principal-Agent Model: Weak Incentives for Strong Performance (September 12, 2016). GATE WP 1628 – September 2016, Available at SSRN: https://ssrn.com/abstract=2837759 or http://dx.doi.org/10.2139/ssrn.2837759

Brice Corgnet (Contact Author)

University of Saint Etienne - Analysis Group and Economic Theory Lyon St-Etienne (GATE-LSE) ( email )

Lyon
France

Joaquín Gómez-Miñambres

Chapman University - The George L. Argyros School of Business & Economics ( email )

One University Dr.
Orange, CA 92866
United States

Roberto Hernan Gonzalez

Université de Bourgogne - Burgundy School of Business ( email )

29 rue Sambin
Dijon, 21006
France

University of Granada ( email )

C/Rector López Argueta S/N
Granada, Granada 18071
Spain

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