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Effort as Investment: Analyzing the Response to Incentives

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Author Info
Friedman, John N. (Harvard U)
Kelman, Steven

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Abstract

We analyze a model in which incentives in one period on one task can affect output more broadly through learning. If agents can invest in human or organizational capital, then output will increase both before and after short-term incentives. We develop a model of these e¤ects, and then we evaluate its predictions using data from hospitals in Britain during a series of limited-time performance incentives offered by the government. We …nd empirically that these policies increase performance not only during the incentivized periods but also before and after, matching the preditctions of our model. We also examine performance along non-incentivized dimensions of quality of care and find little evidence of classical effort substitution.

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Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp07-024.

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Date of creation: May 2007
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Handle: RePEc:ecl:harjfk:rwp07-024

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D20 - Microeconomics - - Production and Organizations - - - General

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  1. Harris, Milton & Holstrom, Bengt, 1982. "A Theory of Wage Dynamics," Review of Economic Studies, Blackwell Publishing, vol. 49(3), pages 315-33, July. [Downloadable!] (restricted)
    Other versions:
  2. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June. [Downloadable!] (restricted)
  3. Canice Prendergast, 2003. "The Limits of Bureaucratic Efficiency," Journal of Political Economy, University of Chicago Press, vol. 111(5), pages 929-958, October. [Downloadable!] (restricted)
  4. Heckman, James J & Heinrich, Carolyn & Smith, Jeffrey, 1997. "Assessing the Performance of Performance Standards in Public Bureaucracies," American Economic Review, American Economic Association, vol. 87(2), pages 389-95, May. [Downloadable!] (restricted)
  5. McNichols, Maureen F., 2000. "Research design issues in earnings management studies," Journal of Accounting and Public Policy, Elsevier, vol. 19(4-5), pages 313-345. [Downloadable!] (restricted)
  6. Stephen Coate & Stephen Morris, 1999. "Policy Persistence," American Economic Review, American Economic Association, vol. 89(5), pages 1327-1336, December. [Downloadable!] (restricted)
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  7. Canice Prendergast, 2007. "The Motivation and Bias of Bureaucrats," American Economic Review, American Economic Association, vol. 97(1), pages 180-196, March. [Downloadable!]
  8. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March. [Downloadable!] (restricted)
  9. Uri Gneezy & Aldo Rustichini, 2000. "Pay Enough Or Don'T Pay At All," The Quarterly Journal of Economics, MIT Press, vol. 115(3), pages 791-810, August. [Downloadable!] (restricted)
  10. Paul Oyer, 1998. "Fiscal Year Ends And Nonlinear Incentive Contracts: The Effect On Business Seasonality," The Quarterly Journal of Economics, MIT Press, vol. 113(1), pages 149-185, February. [Downloadable!] (restricted)
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