Efficiency Wages with Motivated Agents

Many jobs are connected to a prosocial mission, i.e., they have a positive impact on society beyond profit-maximization. This paper uses a modified principal-agent gift-exchange game with positive externality (mission treatment) to study how the mission interacts with the use of efficiency wages in motivating effort. We find that, compared to a standard gift-exchange game (GE treatment), the presence of the mission shifts the agents’ effort choice function upwards without affecting its slope. This means that mission and efficiency wages are independent in motivating effort and, thus, that if principals were profit-maximizers, wage offers should be the same in both treatments. However, principals offer higher wages in the mission treatment. We show that this is due to principals in the GE treatment highly underestimating agents' reciprocity and thereby offering wages below the profit-maximizing level. The results from two robustness-checks further suggest that our findings are unlikely to be driven by a simple efficiency effect but, rather, by the presence of the positive externality { independently, however, from the quality of the mission-matching.