Power of Incentives in Public Organizations When Employees Are Intrinsically Motivated

This paper studies the power of incentives in public organizations when some employees are intrinsically motivated to deliver the socially desirable outcome, while others are only driven by extrinsic incentives. To alleviate agency problems, the standard moral-hazard model suggests the use of instruments such as performance pay. This intervention might interact with intrinsic motivation. I introduce intrinsic motivation into the standard multiple-task moral-hazard model, and identify conditions under which extrinsic incentives lead to crowding in or crowding out of intrinsic motivation. The optimal reward structure shifts away from the use of monetary incentives when more employees are intrinsically motivated.