Higher Purpose, Incentives and Economic Performance
How does organizational higher purpose (HP) affect employee behavior and firm output? We develop an optimal-contracting model which endogenizes HP investment. The model shows that HP dissipates agency frictions, lowers wage costs and elicits higher employee effort. Firm profit is non-monotonic in its HP commitment. Agency costs of external finance in some firms create a negative externality, crowding out HP investments by other firms, with profits non-monotonic in HP investments crosssectionally