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You Don't Always Get What You Pay For

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  • Schnedler, Wendelin

    ()
    (University of Paderborn)

Abstract

Consider a principal-agent relationship in which more effort by the agent raises the likelihood of success. Does rewarding success, i.e., paying a bonus, increase effort in this case? I find that bonuses have not only an incentive but also an income effect. Overall, bonuses paid for success may well reduce effort and hence the probability of success. I also identify conditions under which the income effect dominates the incentive effect, and single out the hazard-rate of effort as a crucial determinant of this trade-off.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3077.

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Length: 9 pages
Date of creation: Sep 2007
Date of revision:
Publication status: published as ' You Don't Always Get What You Pay For: Bonuses, Perceived Income and Effort ' in: German Economic Review, 2011, 12 (1), 1 - 10
Handle: RePEc:iza:izadps:dp3077

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Keywords: moral hazard; bonus; premium; incentives; income effect;

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References

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  1. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
  2. Steven Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 10(1), pages 55-73, Spring.
  3. Armin Falk & Michael Kosfeld, . "The Hidden Costs of Control," IEW - Working Papers, Institute for Empirical Research in Economics - University of Zurich 250, Institute for Empirical Research in Economics - University of Zurich.
  4. Sanford J Grossman & Oliver D Hart, 2001. "An Analysis of the Principal-Agent Problem," Levine's Working Paper Archive 391749000000000339, David K. Levine.
  5. Richard Blundell & Thomas MaCurdy, 1998. "Labour supply: a review of alternative approaches," IFS Working Papers, Institute for Fiscal Studies W98/18, Institute for Fiscal Studies.
  6. Bewley, Truman F, 1995. "A Depressed Labor Market as Explained by Participants," American Economic Review, American Economic Association, American Economic Association, vol. 85(2), pages 250-54, May.
  7. Ernst Fehr & Bettina Rockenbach, 2003. "Detrimental effects of sanctions on human altruism," Microeconomics, EconWPA 0305007, EconWPA.
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Cited by:
  1. Schnedler, Wendelin & Vanberg, Christoph, 2014. "Playing ‘hard to get’: An economic rationale for crowding out of intrinsically motivated behavior," European Economic Review, Elsevier, Elsevier, vol. 68(C), pages 106-115.

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