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.
Corgnet, B., Gómez-Miñambres, J., & Hernán-González, R. (2018). Goal setting in the principal-agent model: Weak incentives for strong performance. Games and Economic Behavior, 109, 311-326. doi: 10.1016/j.geb.2017.12.017
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Available for download on Monday, March 23, 2020