The Extrinsic Motivation of Freedom at Work

Teck Yong Tan (Columbia University)

Abstract: Why does a worker become more efficient when given freedom at work? Under incomplete contracts, a worker faces a ratchet effect of innovating when he is closely monitored: if the worker uncovers a more efficient production method, the firm, being aware of it, raises the future performance requirement; anticipating this, the worker never tries to innovate. When given freedom at work instead, the worker accrues private information about his innovation. The resulting information asymmetry generates information rent which feeds back as the worker’s incentive to innovate and improve efficiency. This paper studies how a firm’s strategic ignorance influences its incentive structure which has to simultaneously induce effort from the worker and endogenously generate asymmetric information against the firm. The resulting mechanism provides a novel rationale to why relationships are sometimes characterized by weak incentives and low-scale production at the early stages.

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