Intrinsic Motivation and Optimal Incentive Contracts

I study the role of intrinsic motivation on optimal incentive contracts. Agents engage in efforts to generate projects with both financial return and intrinsic value to the agent. In a neutral environment, where intrinsic motivation has no direct effect on the disutility of effort, static contracts are unaffected by intrinsic motivation. In contrast, the firm's profits from an implicit contract are increasing in the degree to which the agent is intrinsically motivated, showing that implicit contracts and intrinsic motivation are complements. The results are further extended to consider the role of multiple implicit contracts and product market strategy.