Scandinavian Working Papers in Economics

HERO Online Working Paper Series,
University of Oslo, Health Economics Research Programme

No 2001:4: The Crowding-Out of Work Ethics

Sverre Grepperud () and Pål Andreas Pedersen
Additional contact information
Sverre Grepperud: Institute of Health Management and Health Economics, Postal: P.O. Box 1089 Blindern, NO-0317 Oslo, Norway
Pål Andreas Pedersen: Bodø Graduate School of Business, Postal: N-8049 Bodø, Norway

Abstract: This paper analyses optimal contracts in a principal-agent model where the agent is intrinsically motivated at the outset and there is an endogenous relationship between the structure of incentive payments and intrinsic motivation (crowding effects). The analysis shows that crowding effects have implications for the optimal contract and that under some conditions the principal can do better without implementing any economic incentives. Furthermore, it is shown that when high-powered incentives diminish intrinsic motivation (crowding-out) the first-best solution in a principal-agent framework is unattainable.

Keywords: Agency theory; intrinsic motivation; crowding effects

JEL-codes: J01

17 pages, June 30, 2009

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