You Don't Always Get What You Pay For
AbstractConsider 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 InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3077.
Length: 9 pages
Date of creation: Sep 2007
Date of revision:
Publication status: published as 'You have free access to this content You Don't Always Get What You Pay For: Bonuses, Perceived Income and Effort ' in: German Economic Review, 2011, 12 (1), 1 - 10
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Other versions of this item:
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
- M5 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-11-10 (All new papers)
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