Incentives in Organizations

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In this paper I summarize four new strands in agency theory that help me think about incentives in real organizations. As a point of departure, I being with a quick sketch of the classic agency model. I then discuss static models of objective performance measurement in which firms get what they pay for; repeated-game models of subjective performance assessments; incentives for skill development rather than simply for effort; and incentive contracts between versus within organizations. I conclude by suggesting two avenues for further progress in agency theory: better integration with organizational economics, as launched by Coase and reinvigorated by Williamson, and cross-pollination with other fields that study organizations, including industrial relations, organizational sociology, and social psychology.

Published: Journal of Economic Perspectives, Vol. 12, no. 4 (Fall 1998): 115-132.

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