Non-production-related effort and the limits of contracting

Empirical and behavioral research suggests that workers don't always see work only as a means of obtaining income in return for production-related effort. Rather, they also exert non-production-related effort in order to obtain greater control over their jobs, achieve balance with non-work activities and to further such personal goals as flexibility, self-growth and job- satisfaction. By contrast, the large accounting literature on incentive mechanism design has focused solely on production-related effort, making the implicit assumption that omitting non- production-related effort is without loss of generality. In this paper we develop a model with both types of effort in order to endogenously determine whether non-production-related effort impacts the ability of the firm to achieve its goal through incentive contracts. We show that while introducing non-production-related effort to the principal/agent model limits the power of contracting - meaning that the firm cannot guarantee that it can achieve its desired production- related effort and profit goals - that is not to say that the firm will always be worse off. Depending on the nature of the interaction between the two kinds of effort and their impact on the worker's utility, it is also conceivable that both firm and worker become better off than the standard principal/agent model would predict.