Goal Setting and Monetary Incentives: When Large Stakes Are Not Enough

The aim of this paper is to test the effectiveness of wage‐irrelevant goal‐setting policies in a laboratory environment. In our design, managers can assign a goal to their workers by setting a certain level of performance on the work task. We establish our theoretical conjectures by developing a model in which assigned goals act as reference points to workers’ intrinsic motivation. Consistent with our model, we find that managers set goals that are challenging but attainable for a worker of average ability. Workers respond to these goals by increasing effort and performance and by decreasing on‐the‐job leisure activities with respect to the no‐goal‐setting baseline. Finally, we study the interaction between goal setting and monetary rewards and find, in line with our theoretical model, that goal setting is most effective when monetary incentives are strong. These results suggest that goal setting may produce intrinsic motivation and increase workers’ performance beyond what is achieved by using solely monetary incentives. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.2068. This paper was accepted by Uri Gneezy, behavioral economics.