Intrinsic Motivation and Referrals Within Firms: Evidence from a Large Microfinance Institution

Many organizations rely on internal referrals between employees with differing comparative advantages. Yet when an employee encounters a lucrative opportunity, they may be motivated to retain it even when doing so harms efficiency. We develop a framework that incorporates this tension and characterize optimal referral contracts. When agents are intrinsically motivated, a fixed-price referral contract is optimal, while otherwise a revenue-sharing referral contract is optimal. We implement a field experiment to evaluate these contracts in a large microfinance institution that has both microcredit and a larger “graduation loan.” Both contracts induce microcredit officers to refer more borrowers to the graduation portfolio. Relative to those endorsed before the contract changes, borrowers endorsed afterwards exhibit better repayment in graduation loans and their businesses grow more upon receiving graduation loans. Consistent with the theory, the fixed-price (revenue-sharing) contract performs better for loan officers with high (low) intrinsic motivation. Finally, utilizing existing and novel data on the organizational practices of microfinance institutions around the world, we document that about half of all microfinance institutions have internal graduation programs and of these 48% employ the same compensation practices as our partner lender did prior to the experiment.