A Theory of Mindsets in Organizations

Abstract: The experimental evidence in psychology has confirmed the importance of people’s mindset about their ability since the seminal paper by Dweck and Leggett (1988). This paper examines the incentive effect of an agent’s mindset in organizations. I consider a model in which a principal hires an agent to undertake projects for two periods. At the beginning of the second period, the agent has an opportunity to increase his ability level by exerting the developing effort and has a growth mindset if he overestimates its effect on his ability. I show that the agent with a growth mindset exerts higher effort upon failure owing to the overestimation of the developing effort. However, this positive incentive effect is counterproductive to the first-period effort incentive; the agent with a growth mindset obtains more benefit from failure and thus has less effort incentive to avoid failure in the first period. My results may help to understand firm-level hiring decisions.