Higher Purpose, Incentives and Economic Performance

Authors: Anjan V. Thakor (Olin School of Business, Washington University in St. Louis) and Robert E. Quinn (Ross School of Business, University of Michigan)

Title: Higher Purpose, Incentives and Economic Performance

Abstract: We develop a model of organizational higher purpose and show that it dissipates agency frictions and elicits higher employee effort. The effect on profits depends on the relationship between the higher-purpose utilities of leaders and employees. With positively associated utilities, firm profit is non-monotonic in the commitment to higher purpose; otherwise, profit declines with the commitment to purpose. Agency costs of external finance in some firms crowd out higher-purpose investments by other firms, with profits nonincreasing in higher-purpose investments cross-sectionally. Moreover, higher external financing costs and uncertainty about how much employees’ higher-purpose utilities both reduce higher-purpose investments.