Incentives in Organizations Author(s): Robert Gibbons Source: The Journal of Economic Perspectives, Vol. 12, No. 4 (Autumn, 1998), pp. 115-132 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/2646897 Accessed: 26/03/2009 10:39 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=aea. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit organization founded in 1995 to build trusted digital archives for scholarship. We work with the scholarly community to preserve their work and the materials they rely upon, and to build a common research platform that promotes the discovery and use of these resources. For more information about JSTOR, please contact email@example.com.
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12, Journal of Economic Perspectives-Volume Number4-Fall 1998-Pages 115-132
Incentives in Organizations
n 1975,StevenKerrpublished"On the Follyof Rewarding WhileHopingfor A, B." The argument was simple:you get what you pay for. Kerrdistilled this unifying theme from a disparate set of examples involving politicians, soldiers, doctors, orphanage directors, professors, and students, as well as manufacturing and clerical employees and even human-resource managers. From these examples, Kerr (pp. 77980) concluded that two main causes of distorted incentives are "fascination with an 'objective'criterion, [where] individualsseek to establishsimple, quantifiablestandards against which to measure and reward performance" and "overemphasis on highly visible behaviors, [when] some parts of the taskare highly visiblewhile others are not." It took agency theory 15 years to express Kerr's title, not to mention to evaluate or extend his conclusions. During this period, agency theory was obsessed with the tradeoff between incentives and insurance, even though clear-eyed observationslike Kerr's about the design and performance of real incentive contracts suggested that several other issues are at least as important. Fortunately, recent work has brought agency theory not only to Kerr'sposition but beyond. In this paper I summarize four new strands in agency theory that help me think about incentives in real organizations. As a point of departure, I begin with a quick sketch of the classic agency model. I then discuss static models of objective performance measurement that sharpen Kerr's argument; repeated-game models of subjective performance assessments; incentives for skill development rather than simply for effort; and incentive contracts between versus within organizations. I con-
* Robert Gibbons SloanDistinguished is Sloan School,Massachuof Professor Management, settsInstituteof Technology, Research and National BureauofEconomic Associate, Research, bothin Cambridge, Massachusetts. e-mailaddressis (firstname.lastname@example.org). His
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clude by suggesting two avenues for further progress in agency theory: better integration with organizational economics, as launched by Coase (1937) and reinvigorated by Williamson (1975, 1985), and cross-pollination with other fields that study organizations, including industrial...