Incentives in Organizations: An Overview of Some of the Evidence and Theory

This paper begins with a review of the different forms of evidence on incentives in organizations. It is argued that it is not possible to understand modern organizations using one kind of data or empirical model. There is a need to combine standard regression studies with survey and laboratory evidence to obtain a complete picture of how modern organizations operate. The evidence that we have points to the importance of finding solutions to the problem of incomplete contracting in organizations. This contracting problem can help us understand why it has been so difficult to consistently estimate and test empirical incentive models. An implication of this work is the impossibility of specifying the solution to the optimal contract problem in advance. Rather, incentive problems in organizations must be based on a combination of past experience and experimentation. More work is needed to understand how the market can be used to select those organizations that find efficient solutions to the incomplete contracting problem.