Intrinsic Motivation and Incentives

Workers act in the interests of their employers for a host of reasons. Sometimes money is the motivation, but often it is because they care about what they do. Despite the importance of such intrinsic motivation, the economic literature has offered little in terms of understanding relevant trade-offs when alignment of inherent preferences (rather than monetary interests) is what motivates people. Instead, the literature has focused largely on the efficiency gains that arise from agents sharing the preferences of their employers. This paper offers such a theory of intrinsic motivation, where firms partially solve agency problems by hiring agents with particular preferences. Unlike the previous literature, I show that firms, in general, hire agents who do not share their interests—instead, agents are disproportionately motivated to carry out a subset of what the firm cares about. Specifically, I show that the institution hires the agent with similar preferences to himself only in the limiting case where the agent’s preferences are irrelevant—namely, when output can be perfectly contracted on. Instead, the optimal response of the institution is to hire biased agents, with the degree of bias increasing as contracting measures get worse.