Make it challenging : motivation through goal setting

We study a principal agent model where agents derive a sense of pride when 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 setting, the principal does also want to set goals that affect the agents’ intrinsic motivation to work. Agents differ in their personal standard which determines 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. Thus, although goal setting is payoff irrelevant, since it does not directly affect agents’ wage, it increases agents’ achievement and hence the principal’s profits. Moreover, we show that a mediocre standard agent could end up being the most satisfied one