An analysis of an incentive problem considering non‐monetary utility

The present paper describes a new approach to the agency model, which is a cybernetic model designed to analyze the situation in which an economic actor (the principal) controls the behavior of another actor (the agent), by including the factor of non‐monetary utility (intrinsic motivation). The new model addresses an incentive problem in an organization. An organization is considered to be a system constituted by the principal and the agent. Two state variables of this system, namely productivity and intrinsic motivation, are the focus of the present study. The effect of these variables on how to offer incentive is analyzed. The following results were obtained: when productivity is high and the strength of intrinsic motivation and uncertainty of output are low, organizations should introduce performance‐based incentive system.