Wealth Effects, Incentives, and Productivity
AbstractComparative 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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Bibliographic InfoArticle provided by Wiley Blackwell in its journal Review of Development Economics.
Volume (Year): 1 (1997)
Issue (Month): 1 (February)
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- Dilip Mookherjee, 1997. "Wealth Effects, Incentives and Productivity," Boston University - Institute for Economic Development 77, Boston University, Institute for Economic Development.
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