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Wealth Effects, Incentives, and Productivity

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Mookherjee, Dilip

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Abstract

Comparative static effects of varying the wealth level of a risk-averse agent in a moral hazard setting with limited liability constraints are investigated. There are two principal opposing effects of increasing wealth: the incentive effect, which allows stronger punishments for poor performance, thereby encouraging higher effort; and the preference effect, which reduces the agent's effort incentives owing to income effects in the demand for leisure. It is shown that optimal effort levels are initially constant, subsequently increasing and eventually decreasing in wealth. Hence agents with intermediate wealth levels are the most productive. Copyright 1997 by Blackwell Publishing Ltd

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Article provided by Blackwell Publishing in its journal Review of Development Economics.

Volume (Year): 1 (1997)
Issue (Month): 1 (February)
Pages: 116-33
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Handle: RePEc:bla:rdevec:v:1:y:1997:i:1:p:116-33

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  1. Christa N. Brunnschweiler & Erwin H. Bulte, 2006. "The Resource Curse Revisited and Revised: A Tale of Paradoxes and Red Herrings," Economics working paper series 06/61, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich. [Downloadable!]
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  2. Shawn Ni & Pham Hoang Van, 2005. "High Corruption Income in Ming and Qing China," Working Papers 0503, Department of Economics, University of Missouri. [Downloadable!]
    Other versions:
  3. V. Bhaskar, 2002. "Relative Performance Evaluation and Limited Liability," Economics Discussion Papers 550, University of Essex, Department of Economics. [Downloadable!]
  4. Perroni, Carlo & Proto, Eugenio, 2007. "Moral Hazard and Entrepreneurial Failure in a Two-sector Model of Productive Matching - with an Application to the Natural Resource Curse," The Warwick Economics Research Paper Series (TWERPS) 796, University of Warwick, Department of Economics. [Downloadable!]
  5. Dilip Mookherjee & Ulf von Lilienfeld-Toal, 2005. "Bankruptcy Law, Bonded Labor and Inequality," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series DP-155, Boston University - Department of Economics. [Downloadable!]
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  6. Dilip Mookherjee, 2005. "Decentralization, Hierarchies and Incentives: A Mechanism Design Perspective," Boston University - Department of Economics - Working Papers Series WP2005-034, Boston University - Department of Economics, revised Sep 2005. [Downloadable!]
    Other versions:
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