Internal Incentives, Externalities Incentive Manager Contract Design

A central tenet of economics is that individuals respond positively to incentives. By contrast, Psychologists, experts in human resource management and sociologists have long emphasized the central role played by intrinsic incentive in many economic interactions. And the interplay between individual's motivations and more generalized social norms is an important factor that economics research the feasibility of incentive mechanism design. The present paper firstly identifies conditions under which rewards (extrinsic incentives) indeed have "hidden costs". It believes that explicit incentive schemes may sometimes backfire by undermining agents' confidence in their own abilities or in the value of the rewarded task. In the sense that they are only weak reinforces of the desired behavior by the principal. In the short run, and become negative reinforces once withdrawn. The paper provided an analysis that several intrinsic incentives such as empowerment and coaching can equilibrate the intrinsic and extrinsic motivations of managers in the end, and contributed to reconcile to the economic and the psychological views.