Charity, incentives, and performance

Many companies spend substantial resources to be viewed as socially responsible. We argue that one reason firms do this is to create a warm glow about the firm in order to affect employee behavior. This proposition is tested with an incomplete contract principal-agent laboratory experiment where warm glow principals make donations to charity. The results show that both principals and agents have higher earnings in treatments where principals are working on behalf of a charity. Only in the charity treatments do agents respond to the effort levels suggested by the principals, and do higher requested levels of effort result in higher principal earnings.