Incentives and the organization of institutions

Motivation plays an important role in institutions such as firms. The problem in such institutions is that the self-interest of people may lead them to choose actions that their superiors feel to be suboptimal. Examples are ubiquitous: Firm managers usually want employees to work harder than employees would prefer, shareholders want firm managers to invest in profit enhancing projects, while managers want to choose projects being associated with high private benefits. As these examples indicate, the motivational problems oftentimes stem from the fact that in institutions people do not bear all costs and/or benefits from their actions. Therefore, they do not undertake the actions that are most beneficial from an institutional point of view. It is this divergence of interests that brings incentives into play. Incentives are used to align the objectives of different parties. It is important to note that the setting of incentives within an institution is not independent of the institution`s organizational structure. A different organizational structure may lead to different kinds of available incentive instruments or, similarly, may change the need for different incentive instruments. The aim of this book is to develop a broader understanding of how the setting of incentives interacts with the chosen organizational structure. To do so, this interaction is analyzed in a variety of settings, for instance, under different ownership structures, under different organizations of work and under different assumptions about the available performance measures.