Identity, Incentives, and the Value of Information

Abstract

We examine the impact of identity preferences on the interrelation between incentives and performance measurement. In our model, a manager identifies with an organization and loses utility to the extent that his actions conflict with effort-standards issued by the principal. Contrary to prior arguments in the literature, we find conditions under which a manager who identifies strongly with the organization receives stronger incentives and faces more performance evaluation reports than a manager who does not identify with the organization. Our theory predicts that managers who experience events that boost their identification with the firm can decrease their effort in short-term value creation. We also find that firms are more likely to employ less precise but more congruent performance measures, such as stock prices, when contracting with managers who identify little with the organization. In contrast, they use more precise but less congruent measures, such as accounting earnings, when contracting with managers who identify strongly with the firm.

Accountability in an agency model: Project selection, effort incentives, and contract design*

“…Similar to psychological costs from deviating from norms (Akerlof & Kranton , ; Heinle et al, ), accountability can be interpreted as a psychological cost imposed on the agent . It is a cost that goes beyond possible monetary costs of justification by documenting available project options.…”

“…5 Intuitively, investors' expectations of a firm's performance are to some extent exogenous; or, the firm's profit target breaks down to targets for individual divisions and employees so that the threshold is exogenous to the contractual relation between employee and immediate superior. 6 Similar to psychological costs from deviating from norms (Akerlof & Kranton 2000Heinle et al, 2012), accountability can be interpreted as a psychological cost imposed on the agent. 7 It is a cost that goes beyond possible monetary costs of justification by documenting available project options.…”

“…In these models psychological phenomena and their effects on decision making and contract design are analyzed. Examples include identity or engagement with the firm (Akerlof & Kranton, , ; Heinle, Hofmann, & Hofmann, ) or utility from status (Marino & Ozbas, ). Both identity and status incentives can help the principal to reduce expected costs of implementing a given action.…”

Endogenous Effort Norms in Hierarchical Firms

“…Akerlof and Kranton (2005) show that employees identifying with the …rm accept lower wages and require lower incentives. The authors consequently claim that it is valuable for …rms to invest in changing their employees'identity (also see Heinle et al 2012, who derive optimal contracts when agents may identify with the …rm in a multi-task setting). Carlin and Gervais (2009) model morality as a self-imposed restriction to exert high e¤ort.…”

Identity in Family Firms: A Theoretical Analysis of Incentives and Contracts

“…Also, the authors observed that CEO organization identification is a substitute for external controls mechanisms with respect to agency problems, therefore reducing the overall agency costs. Finally, Heinle, Hofmann and Kunz (2012) presented theoretical arguments suggesting that firms which successfully implemented identity initiatives can undermine managers' effort in short-term and boost long-term value generation.…”