Guilt, Esteem, and Motivational Investments

33 Pages Posted: 12 Sep 2020

See all articles by Maitreesh Ghatak

Maitreesh Ghatak

London School of Economics (LSE) - Department of Economics

Zaki Wahhaj

University of Kent - Department of Economics; University of Namur; University of Kent - School of Economics

Date Written: August 2020

Abstract

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.

Keywords: investment in worker motivation, Job Satisfaction, Motivated agents, worker moral hazard

JEL Classification: D23, D86, D91, J33

Suggested Citation

Ghatak, Maitreesh and Wahhaj, Zaki, Guilt, Esteem, and Motivational Investments (August 2020). CEPR Discussion Paper No. DP15172, Available at SSRN: https://ssrn.com/abstract=3688120

Maitreesh Ghatak (Contact Author)

London School of Economics (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom
44 20 7852 3568 (Phone)
44 20 7955 6951 (Fax)

HOME PAGE: http://sticerd.lse.ac.uk/dps/adds/ghatak/cv-lse-sept02.pdf

Zaki Wahhaj

University of Kent - Department of Economics ( email )

Keynes College
Kent, CT2 7NP
United Kingdom

University of Namur ( email )

8 Rempart de la Vierge
Namur, 5000
Belgium

University of Kent - School of Economics ( email )

CT2 7NP
United Kingdom

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