Affiliation: New York University
Title: “Performance Incentives with Multiple Instruments”
Abstract: In many organizations, performance is incentivized with a mix of monetary bonuses and non-monetary rewards such as promotions or perquisites. We study the tradeoff between these rewards in a classic moral hazard setting augmented with non-monetary prizes, whose allocation may be distorted to provide rewards or punishments. An optimal scheme punishes low performers by withholding prizes and rewards high performers with extra prizes and possibly a monetary bonus. Both punishments and rewards strengthen as effort becomes more difficult to incentivize, and money is used only when very strong incentives are required. Additionally, when agents are heterogeneous, optimal incentives tilt away from rewards and toward punishments as aggregate effort increases.