Goal Setting in the Principal-Agent Model: Weak Incentives for Strong Performance

Brice Corgnet (1, 2) , Joaquín Gómez-Miñambres (3, 4) , Roberto Hernán-Gonzalez (5)

1 EM - EMLyon Business School
2 GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne
3 Chapman University
4 Bucknell University
5 Nottingham University Business School [Nottingham]

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. We show that average performance of agents is higher in the presence of goal setting than in its absence 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. It follows that recognizing 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.

Mots clés: Principal-agent models; incentive theory; non-monetary incentives; goal setting; reference-dependent utility; laboratory experiments

Domaines: Economies et finances

Brice Corgnet, Joaquín Gómez-Miñambres, Roberto Hernán-Gonzalez. Goal Setting in the Principal-Agent Model: Weak Incentives for Strong Performance. 2016. ⟨halshs-01364444⟩