HANDBOOK OF LABOR ECONOMICS, VOL 4A

5 Dual-Purpose incentives: can pay destroy intrinsic motivation?

In Section 3 we discussed dual-purpose incentives as they arise in conventional models of extrinsic rewards, noting that they arise in many contexts, including the use of compensation practices to signal some otherwise-unobserved characteristic of the firm, to avoid adverse selection of workers along some otherwise-unobserved characteristic, and to deal with multi-tasking. We return in this section to the study of incentives that must do “double duty,” but now the second role concerns intrinsic motives.

5.1 Pay and selection on dedication

To set the stage, we begin with an extremely simple model in which increasing pay induces adverse selection along an important dimension—dedication ...