Incentives for motivated agents under an administrative constraint

Consider an agent who has an expertise in producing a non-marketable good. This good is valued by a single principal, and there is a verifiable measure of the agent’s performance. Crucially, the agent is intrinsically motivated due to ‘warm glow altruism’. In addition, the agent’s budget, which is controlled by the principal, must not be less than the monetary performance-cost faced by the agent. This gives rise to a limited-liability constraint. It also restricts the agent’s ability to under-report costs. In such environment, we determine the link between the agent’s budget and performance. Our results come in contrast to the received solution of the principal-agent problem and to most in the literature on mission-motivated organisations and public services provision.