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Status Incentives

By Besley and Maitreesh Ghatak

Abstract

When economists study incentives in organizations, the main focus has been on using monetary payments in exchange for performance on speci c measurable dimensions. But organizations use a wide variety of means to motivate their workers. One such method which has not been studied much to date, is the explicit creation of status rewards attached to good performance. 1 Under such schemes, an agent is given a positional good – such as a job title or a medal – whose value comes from its scarcity. Some organizations, such as the military, make extensive use of medals as status rewards rather making cash payments. Academia too is awash with job titles, fellowships and prizes whose value is mostly symbolic but which convey status on their recipients. In this paper, we consider the role of such status awards as an incentive device. We allow a principal to reward an agent for good performance in conventional terms (i.e. with money) and/or by giving him a positional good. We suppose that the latter has a zero marginal cost. (We have in mind rewards like “employee of the month ” or “full professor ” or “vice president”.) To the extent that the positional good is valued, the organization is exploiting a preference for status to motivate agents. However, the extent of the status conveyed depends on how scarce the reward is and requires a well-de ned rule which rewards only the deserving. The paper studies a model with moral hazard and limited liability which limits the ability of an organization to achieve its desired effort level using monetary incentives. Beside the standard problems that stem from this, we also add the possibility that desired output is hard to measure. Speci cally, even if the-nal output is observable, we assume that it is not veri able. The principal needs to condition rewards o

Year: 2008
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