Social Incentives in Organizations

Abstract

We review the evidence on social incentives, namely on how social interactions with colleagues, subordinates, bosses, customers, and others shape agents’ effort choices in organizations. We propose a two-way taxonomy based on ( a) whether the social group is horizontal (peers at the same level of the hierarchy) or vertical (individuals at different levels within or outside of the organization) and ( b) whether the agent's effort creates externalities for the other members of their social group. We show settings in which social incentives improve productivity and settings in which they reduce it. In most cases, the size of the effect is approximately 10%, which is half of the typical effect of performance pay. We also show that social incentives can interfere with financial incentives, making them ineffective or even detrimental. We conclude that social incentives are a powerful motivator that must be taken into account in the design of organizational policies and that more research is needed to understand how policies can shape the preferences that underpin these incentives.

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