Motivational investments and financial incentives

Ghatak, Maitreesh ORCID: 0000-0002-0126-0897 and Wahhaj, Zaki (2025) Motivational investments and financial incentives. Journal of Law, Economics, and Organization. ISSN 8756-6222

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Abstract

If firms can invest in the motivation of workers to undertake costly effort, how does that affect the choice of explicit financial incentives? We develop a simple principal–agent model where the standard optimal contract is to offer a bonus that trades off incentive provision versus rent extraction. We allow the principal to undertake two types of motivational investments—one that increases the agent’s disutility from deviating from a prescribed effort level, and another that reduces the cost of effort. We refer to these as guilt and inspiration, respectively. We characterize the conditions under which motivational investments and financial incentives are substitutes and complements, and find that it depends on the type of the investment as well as whether the worker’s participation constraint is binding.

Item Type:	Article
Additional Information:	© 2025 The Author(s)
Divisions:	Economics
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HG Finance
JEL classification:	D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior; Transaction Costs; Property Rights D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory D - Microeconomics > D9 - Intertemporal Choice and Growth > D91 - Intertemporal Consumer Choice; Life Cycle Models and Saving J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J33 - Compensation Packages; Payment Methods
Date Deposited:	10 Mar 2025 16:57
Last Modified:	08 Apr 2025 08:18
URI:	http://eprints.lse.ac.uk/id/eprint/127532

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