Wage Policies, Incentive Schemes, and Motivation

  • Gary CharnessEmail author
  • Michael Cooper
  • J Lucas Reddinger
Living reference work entry


This chapter reviews the literature on both financial incentives and nonmonetary motivations (social preferences) that affect effort and performance in the labor market. Neoclassical theory implies that higher levels of financial incentives should monotonically increase effort. While this is true over much of the wage range, experimental and applied evidence shows that both very low and very high levels of incentives can violate this theory. Low levels of pay may crowd out intrinsic motivation, while high levels of pay may cause involuntary arousal, or “choking,” that reduces performance; however, recent literature has sometimes found contradictory evidence on these effects. Social preferences for fairness and reciprocity also impact the effort decisions of workers. With respect to wage changes, the literature shows that negative reciprocity is typically considerably stronger than positive reciprocity. Additionally, perceptions of fairness in terms of co-worker wages can impact effort. Taken as a whole, the behavioral effects of financial and nonfinancial motivators depend heavily on the context of the labor market and the types of workers and tasks involved.


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Copyright information

© Springer Nature Switzerland AG 2020

Authors and Affiliations

  • Gary Charness
    • 1
    Email author
  • Michael Cooper
    • 1
  • J Lucas Reddinger
    • 1
  1. 1.University of CaliforniaSanta BarbaraUSA

Section editors and affiliations

  • Marie Claire Villeval
    • 1
  1. 1.GATECNRS – University of LyonEcullyFrance

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