Motivation, Altruism and Effort

1. Motivation, Altruism and Effort Cécile Aubert ESNIE 2007 • How are incentives to exert effort affected by the intrinsic motivation or altruism of the agent (e.g., a worker)? • Is it always cheaper for the principal (e.g., employer) to select a more motivated agent? How are attitudes towards risk modified? • How do you screen agents according to their motivation?...

2. Introduction • Wide range of issues to be studied, with particular interest for a number of situations: non-profits and NGOs, corporate social responsibility, ‘green’ consumers, personnel economics,... • Importance of having caring bureaucrats: cf. presentation by Avinash Dixit. • A testimony of the recent interest for this literature: A bunch of references on next slides… (Beware: I am leaving aside experimental work, and motivation for reciprocity – due to lack of time. An interesting survey: Fehr and Falk, EER 2002.). Motivation, Altruism and Effort

3. A short selection of references (1) • Obviously, works by Frey, by Fehr, Schmidt, Gächter,… are important (see Fehr and Falk, 2002). • Bénabou and Tirole (2003) – ‘Intrinsic and Extrinsic Motivation’, RES. • Bénabou and Tirole (2006) – ‘Incentives and Prosocial Behavior’, AER. • Besley and Ghatak (2005) – ‘Competition and Incentives with Motivated Agents’, AER. • Delfgaauw and Dur (2007a) – ‘Signaling and Screening of Workers’ Motivation’, JEBO. • Delfgaauw and Dur (2007b) – ‘Incentives and Workers’ Motivation in the Public Sector’, forthcoming EJ. Motivation, Altruism and Effort

4. A short selection… (2) • Francois (2000) – ‘Public Service Motivation as an Argument for Government Provision’, JPublicE. • Other papers by Francois (2001, 2003, 2007) on related issues. • Brekke and Nyborg (2004) – ‘Moral Hazard and Moral Motivation: Corporate Social Responsibility as Labor Market Screening’, mimeo Oslo. • Rowat and Seabright (2006) – ‘Intermediation by Aid Agencies’, JDE. • Aubert (2006) – ‘Work Incentives and Household Insurance: Sequential Contracting with Altruistic Individuals and Moral Hazard’, EL. Motivation, Altruism and Effort

5. Some of my working papers I will build on • Aubert, 2007 – ‘Effort incentives with different sources of intrinsic motivation’ • Aubert, 2006 – ‘Incentive costs with respect to parents-workers and other altruistic agents’ • Aubert, 2006 – ‘Screening altruistic agents under moral hazard’

6. Stylized facts • People are intrinsically motivated, and this affects incentives. • Monetary incentives may (or not) crowd out intrinsic motivation. E.g., people may be more willing to give blood when not paid for it than when paid a little. • NGOs tend to offer lower wages, and still attract qualified workers. • People care for other individuals and may care for some perception of social welfare. • People do make gifts, even when no reciprocity is expected. • People may ‘behave’ even when no sanction is likely. • What can we say about effort incentives and motivation?... Motivation, Altruism and Effort

7. What is ‘motivation’? What is the exact source of the intrinsic interest one may feel towards some outcome? • Pure altruism? with respect to whom? Paternalistic? • ‘Warm-glow’ / joy of giving? • Categorical imperative (Kant) ? • Self-image? • Reputation? • Reciprocity? • … The literature tends to consider them in isolation. Motivation, Altruism and Effort

8. Motivation in the recent literature – Impact of given tastes/motivation: • Besley – Ghatak (2006): matching problem between motivated principals and agents, focus on competition. • Prendergast (2007). • Rowat – Seabright (2006), Francois (2007), Delfgaauw – Dur (2007a): screening, commitment. – Signalling one’s tastes: • Seabright (2006): signal altruism and social preferences. • Bénabou – Tirole (2006): obtain (self-)esteem. – Learning one’s tastes: Bénabou – Tirole (2003) : Informed principal, signalling valuable information to the agent. Motivation, Altruism and Effort

9. Main issues (a reminder) • Assume that intrinsic motivation, pro-social interest, altruism, etc., are given characteristics (taste) of individual preferences. • How do these characteristics affect incentive costs? Especially in the presence of risk? • Can other agents (e.g., employers) take advantage of them? • How may one do signalling/sorting? Motivation, Altruism and Effort

10. Outline Bénabou – Tirole (2003) : left for the discussion. It was required reading so you read it anyway…(?) Difficult to do justice to the papers presented in so short a time… so you should really read them if you are interested! A – Signalling and sorting B – Motivation, risk and incentive costs C – Altruism towards third parties Motivation, Altruism and Effort

11. A – Signalling and sorting • Can one signal motivation / altruism / pro-social behavior when this is desirable • for direct (self-)esteem reasons, • or because of future matching / opportunities, that will depend on one’s reputation? • How can principals (e.g., employers) screen agents according to their level of motivation? Are low wages enough? Motivation, Altruism and Effort

12. A.1. Signalling altruism and lack of greed • Bénabou – Tirole (2006, AER): Individuals are • ‘altruistically motivated’ (over some ‘social’ good a), • but also care for monetary transfers (t), • and for their reputation for being altruistic, and for not being greedy. Note: The double dimension in reputation is essential. • True valuations for the social good and for money differ across individuals and are private information  Actions (consumption) convey information as to true types. Motivation, Altruism and Effort

13. Bénabou-Tirole (2006) The model U = (ve + vt t)e – C(e) + x[γeE(ve/e,t) – γt E(vt/e,t)] x: visibility of actions taken / consumption level e, γe: intensity of concern for altruism reputation, γt: idem for reputation about greed. Then 4 major predictions. Motivation, Altruism and Effort

14. Bénabou – Tirole (2006) (Simplified) main results • Monetary transfers provide incentives… but reduce the reputation for altruism derived from ‘pro-social’ actions. • Visibility encourages pro-social actions… up to a point: when an action is too visible, it attracts less motivated agents, thereby blurring the signal. People may choose to be modest about their good deeds. • Multiple equilibria Inferring someone’s characteristics requires knowing others’ behavior (i.e., which eq. will arise?). • Socially optimal incentive scheme: ‘tax’ reputation-seeking activities that are socially wasteful. Motivation, Altruism and Effort

15. A.2. Sorting agents • Brekke – Nyborg (2004): Use corporate social responsibility (= costly action) to take advantage of the boost inself-esteem for motivated workers thanks to CSR. Under specific assumptions: • Employees evaluate their actions by the social welfare obtained if everybody else behaved as they do… • …and if others had the same preferences as themselves. • Additive specification of the utility functions. Then CSR can be a sorting device, and both pooling and separating equilibria may arise. Motivation, Altruism and Effort

16. Delfgaauw – Dur (2007a): • Effort deterministically determines production  no risk. • Employees are directly motivated by effort; • Motivation enters their utility in a concave way  at some point, the cost of effort more than compensates motivation. Ui = h(t) + g(γi e) – C(e) where g(.) concave. • The degree of motivation, γi, is private information. • Higher transfers t increase the probability of filling a vacancy, but reduce the average level of motivation of applicants. Motivation, Altruism and Effort

17. B – Motivation, risk and incentive costs • Most of the literature: Motivation is assumed (possibly indirectly) to reduce incentive costs. • Typically, u(t,M,e) ≡ h(t) + g(M) – C(e) where t: monetary transfer from principal, M: ‘motivation’ w.r.t. task / action e: effort, h(.) and g(.) increasing concave, C(.) increasing convex.  Additive separable specifications (i.e., all cross-derivatives are null). Motivation, Altruism and Effort

18. Motivation and incentives – cont’d • So what? • (Aubert, 2007, Effort incentives with different sources of intrinsic motivation) • With such additive specifications, in a standard effort context, more motivation always reduces incentive costs. • Indeed, no ‘wealth effects’, hence more motivation is • formally equivalent to, either, a reduction in disutility of effort, or an increase in monetary transfer, • by an amount that does not vary with, respectively, either the effort level, or the transfer chosen. Motivation, Altruism and Effort

19. More on this Aubert (2007) 1. Additive separability is thus with loss of generality. • Consider MaxeEeu(t(y),y) – C(e) where y is the level of performance. • The principal may actually have to offer payments decreasing in performance(!) in order to reduce the level of risk borne by the motivated agent. • E.g., one may not want nurses or surgeons to be too affected by the condition of their patients, as they might otherwise suffer too much for efficiency. Motivation, Altruism and Effort

20. More on this (2) Aubert (2007) 2. u12(.,.) plays a crucial role (see later). Is it realistic to have u12(.,.) ≡ 0? In practice, motivation is likely to affect the agent’s marginal valuation for money (e.g., an agent working in order to provide for his children will have a different valuation than a childless agent). Different sources of motivation may imply different participation constraints: Do you care for what happens if you refuse the contract? No if you are concerned only by your reputation in achieving a task  Yes if you are altruistic.  Different incentive costs. C. Aubert, ESNIE 2007 Motivation, Altruism and Effort 20

21. C – Altruism towards 3rd parties • Aubert (2006) ‘Incentive costs with respect to parents-workers and other altruistic agents’. • Consider altruism with respect to a 3rd party, e.g.: one’s child. Does altruism just imply a change in utility functions? If so, what impact? • Being able to transfer resources to a loved one modifies your utility from money, and your degree of risk aversion.  Impact on willingness to participate in a contract + on willingness to exert effort. Motivation, Altruism and Effort

22. C.1. Providing for someone • Principal P delegates some task to agent A, and pays him t. • A exerts effort e, at disutility ψ(e), to increase the proba. of success in the task. • A cares for B… • and transfers x out of t to B. Parameter  (≥ 0) = intensity of altruism. • A°: uA1(.,.) > 0, uA2(.,.) > 0, uA11(.,.) < 0, uA12(.,.) ?, uA111(.,.) ? P Contract $ (t) Altruism A B uA(t-x,  uB(x)) – ψ(e) uB(x)  Motivation, Altruism and Effort

23. Standard moral hazard problem A’s effort : e = 0 or 1  Proba of success: p1 > p0. Cost of effort  > 0.e, ψ : Not observable. P offers t in case of success,t in case of failure. P obtains S , t pe Success e 1 - pe 0 , t Failure Motivation, Altruism and Effort

24. Benchmark: The ‘individualistic’ agent • Expected utility: E uA(t,0) – ψ e. Denote h(.)  uA(., 0) with h(.): concave von Neumann-Morgenstern, h(0) = 0. • Participation and incentive constraints: p1h(t) + (1 – p1)h(t) –   h(0) (P) (p1– p0)[h(t) – h(t )]  (IC) • Optimal contract: Motivation, Altruism and Effort

25. Incentives for an altruistic agent • A cares for B and transfers x out of t. Utilities: uA (t – x, uB) –  e and uB = uB (x). • What now matters for incentives is: • Same constraints but with a different utility function, ũ(.). • Optimal contract:  Do we havep1ti + (1 – p1) ti > p1ta + (1 – p1) ta ? < Motivation, Altruism and Effort

26. When is an altruistic agent preferred? • Note first that there is no a priori reason to have ũ(0) = uA(0, uB(0)) > or < to uA(0,0) (= 0). (suffer more from poverty when dear ones suffer as well, or feel happier as they exist?). uB(0) measures vulnerability? • The principal prefers a more altruistic agent (a higher ) when uB(x) uA12(y – x,  uB(x))  0 for all (y, x=x(y)) The principal always prefers the agent to be altruistic when altruism increases the marginal utility from transfers, i.e., reduces the MRS between money and effort. Motivation, Altruism and Effort

27. Corollary 1. The principal always benefits from altruism when uA(.,.) is additive separable in the utility of B: uA(t – x,  uB(x)) = h(t – x) +  g(uB(x)) Hence a loss of generality in this context for the specification most (and largely) prevalent in the literature… 2. Agents may want to lie as to their degree of altruism  Specific screening issue: type-dependent reservation utilities that are correlated to marginal utility from transfers. Stochastic contracts may be needed for sorting – but it may also be that you can sort agents at no cost, eventhough altruistic agents are less paid. Motivation, Altruism and Effort

28. C.2. Mutual altruism and insurance • A situation in which altruism implies more than ‘a simple change in utility functions’ : Altruism between working spouses. • Aubert (2006) – ‘Work Incentives and Household Insurance: Sequential Contracting with Altruistic Individuals and Moral Hazard’, EL. • Altruism  Resource sharing  Insurance possibilities that threaten incentives. • The 1st principal may no longer induce effort, or may have to offer steeper contracts to obtain it. Motivation, Altruism and Effort

29. PA PB PA plays 1st and pays A before knowing B’s performance ≠ PB can condition B’s wage to A’s. $ $ 1st 2nd (tB) (tA) B A • PB may gain by insuring B against income variations from task A. • Incentive constraint for PA, w.r.t. PB  ≥ 0 • PA must offer riskier contracts to induce effort. Motivation, Altruism and Effort

30. Conclusion • Still much to be done to obtain a coherent global picture… • What we know: • Diverse sources of motivation may explain a wide range of stylized facts. • More motivation or altruism does not always imply lower incentive costs. • The exact type of motivation considered is crucial. • The utility specification used may be with loss of generality. • Can we find utility functions that allow considering several sources of motivation without being too restrictive? • … Motivation, Altruism and Effort