Higher Purpose, Incentives and Economic Performance

Higher Purpose, Incentives and Economic Performance

Anjan Thakor, Robert Quinn

Series number :

Serial Number: 
706/2020

Date posted :

October 28 2020

Last revised :

October 28 2020
SSRN Share

Keywords

  • Organizational performance • 
  • Higher purpose • 
  • Incentives • 
  • agency frictions

How does organizational higher purpose affect employee behavior and firm output? We develop an optimal-contracting model which shows that pursuing organizational higher purpose dissipates agency frictions, lowers wage costs and elicits higher employee effort.

The effect on profits, however, depends on whether the authenticity of the firm’s higher purpose matters to employees or they care only about how much the firm invests in that purpose. When authenticity does not matter, the firm’s profit declines with its investment in higher purpose. But when authenticity matters, firm profit is non-monotonic in the commitment to higher purpose. The possibility of agency costs of external finance in some firms creates a negative externality, crowding out higher-purpose investments by other firms, with profits nonincreasing in higher-purpose investments cross-sectionally. When customers and/or investors care about the firm’s higher purpose, the equilibrium wages of employees decline and higher purpose investments by firms increase.

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Authors

Real name:
Robert Quinn
Professor
Real name:
Anjan Thakor
Research Member
John M. Olin School of Business, Washington University, St. Louis