This paper focuses on the endogenous determination of effort as a source of productivity growth. The economy is populated by infinitely lived households. Every period, members of each household may choose whether to be self-employed or become employees in a "corporate sector". Labor relations in the corporate sector are characterized by a double-moral hazard problem. To induce effort, the optimal labor contract stipulates for a bonus. Nevertheless, due to double moral hazard, employees extract some rents. As the economy grows, employees' rents increase, thereby raising the marginal benefit of monitoring. The ensuing changes in the optimal labor contract induce higher effort along the growth path. The model creates an endogenous association between growth and total factor productivity, and demonstrates that substantial cross-country productivity differences may be ascribed to differences in incentive structures.
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Benjamin Bental & Dominique Demougin, 2006.
"Incentive Contracts And Total Factor Productivity,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 1033-1055, 08.
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Find related papers by JEL classification: D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
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