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The tenuous relationship between effort and performance pay

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  • Kvaløy, Ola
  • Olsen, Trond E.

Abstract

When an agent is offered performance related pay, the incentive effect is not only determined by the shape of the incentive contract, but also by the probability of contract enforcement. We show that weaker enforcement may reduce the agent's effort, but lead to higher-powered incentive contracts. This creates a seemingly negative relationship between effort and performance pay.

Suggested Citation

  • Kvaløy, Ola & Olsen, Trond E., 2015. "The tenuous relationship between effort and performance pay," Journal of Public Economics, Elsevier, vol. 121(C), pages 32-39.
    • Handle: RePEc:eee:pubeco:v:121:y:2015:i:c:p:32-39
    DOI: 10.1016/j.jpubeco.2014.10.007
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. On the negative correlation between effort and pay
      by Economic Logician in Economic Logic on 2012-06-29 20:49:00

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    More about this item

    Keywords

    Incentives; Performance pay; Contract enforcement;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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