Motivation through goal setting

We study a principal agent model where agents derive a sense of pride from accomplishing production goals. As in classical models, the principal offers a pay-per-performance wage to the agent, determining the agent's extrinsic incentives. However, in our model, the principal uses goal setting policies as a tool to manage agents' intrinsic motivation. To capture the idea that different agents respond differently to different goals we introduce the concept of personal standards which determine what becomes challenging and rewarding to them, and hence the intensity of their intrinsic motivation to achieve goals. We show that, at the optimal contract, the agents' production, as well as the goals set by the principal, increase with the agents' personal standards. Moreover, we show that an intrinsically motivated agent gets higher surplus than an agent with no intrinsic motivation in the form of informational rents but an agent with a mid-ranged standard (and hence productivity) could end up being the one most satisfied. Therefore, our model can be helpful to explain some empirical findings in the literature of job satisfaction such as the so called "paradox of happiness". (C) 2012 Elsevier B.V. All rights reserved.