Job challenge as a motivator in a principal–agent setting

We analyze the tradeoff between monetary and non-monetary incentives in a principal–agent framework where the principal chooses job-challenge (job-design) to provide non-monetary incentives. We capture the construction of job-challenge as a motivator based on Atkinson. Specifically, more challenging jobs reduce the probability of success but increase the marginal productivity of the agent's effort. This provides the agent with a sense of accomplishment from which the agent derives utility. We show that there are three effects of job-challenge when we consider information asymmetries. The substitution effect arises because non-monetary incentives can be used to substitute for monetary incentives. The risk effect arises because job challenge can be used to impose some of the risk needed to mitigate the impact of hidden-action, rather than having to impose risk through monetary incentives which could be costlier to the principal. The informativeness effect arises because the final outcome is more informative on the hidden-action of the agent and thus less risk needs to be imposed through the monetary incentives than in a model that does not feature job-challenge. The cost to the principal of designing challenging jobs arises from the decreased expected output.