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Goal setting in the principal–agent model: Weak incentives for strong performance

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  • Corgnet, Brice
  • Gómez-Miñambres, Joaquín
  • Hernán-González, Roberto
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. Agents' performance is higher in the presence of goal setting 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. 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.

Suggested Citation

  • Corgnet, Brice & Gómez-Miñambres, Joaquín & Hernán-González, Roberto, 2018. "Goal setting in the principal–agent model: Weak incentives for strong performance," Games and Economic Behavior, Elsevier, vol. 109(C), pages 311-326.
    • Handle: RePEc:eee:gamebe:v:109:y:2018:i:c:p:311-326
    DOI: 10.1016/j.geb.2017.12.017
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    More about this item

    Keywords

    Principal–agent models; Incentive theory; Non-monetary incentives; Goal setting; Reference-dependent utility; Laboratory experiments;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • M54 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Management

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