The Effect of External Incentives on Profits and Firm-Provided Incentives Strategy

Azar, Ofer H. (2003): The Effect of External Incentives on Profits and Firm-Provided Incentives Strategy. Forthcoming in: Journal of Socio-Economics

Abstract

The article examines the firm's choice of incentives when workers face additional incentives (“external incentives”) to those provided by the firm, such as building reputation that improves the workers' prospects with other employers, or satisfaction from working well. Surprisingly, the firm might find it optimal to increase the incentives it provides following an increase in external incentives. Even if the firm reduces its incentives, however, total incentives unambiguously increase, leading to higher effort and profits. This implies that firms should try to increase the external incentives that their workers face; I suggest several ways firms can do so.

• Item Type: MPRA Paper
• Institution: Ben-Gurion University of the Negev
• Language: English
• Keywords: Worker satisfaction; Personnel economics; External incentives; Worker reputation; Intrinsic motivation
• Subjects: D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior: Theory; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L20 - General; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J30 - General; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M5 - Personnel Economics > M52 - Compensation and Compensation Methods and Their Effects; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M2 - Business Economics > M20 - General

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