Intrinsic Motivation and Optimal Incentive Contacts

By Kevin Murdock
1998| Working Paper No. 1506

This paper studies the role of intrinsic motivation on optimal incentive contacts. Agents engage in effort to generate projects with both financial return and intrinsic value to the agent. In a neutral environment, where intrinsic motivation has no direct effect on the disutility of effort, static contacts are unaffected by intrinsic motivation. In contrast, the firm’s profit from an implicit contract are increasing in the degree to which the agent is intrinsically motivated, showing that implicit contracts and intrinsic motivation are complements. The results are further extended to consider the role of multiple implicit contracts and product market strategy.