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Incentive Contracts and Total Factor Productivity

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  • Benjamin Bental
  • Dominique Demougin

Abstract

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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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 0325.

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Date of creation: 2003
Date of revision:
Handle: RePEc:lvl:lacicr:0325

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Keywords: Incentive contracts; Total factor productivity; Economic growth;

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References

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  1. Dominique Demougin & Claude Fluet, 1998. "Mechanism Sufficient Statistic in the Risk-Neutral Agency Problem," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 154(4), pages 622-, December.
  2. Prescott, Edward C, 1998. "Needed: A Theory of Total Factor Productivity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 525-51, August.
  3. Narayana R. Kocherlakota, 2001. "Building blocks for barriers to riches," Staff Report 288, Federal Reserve Bank of Minneapolis.
  4. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc.
  5. Edward C. Prescott & Stephen L. Parente, 1999. "Monopoly Rights: A Barrier to Riches," American Economic Review, American Economic Association, vol. 89(5), pages 1216-1233, December.
  6. Shi, Shouyong, 1998. "Search for a Monetary Propagation Mechanism," Journal of Economic Theory, Elsevier, vol. 81(2), pages 314-352, August.
  7. Demougin, Dominique & Fluet, Claude, 2001. "Monitoring versus incentives," European Economic Review, Elsevier, vol. 45(9), pages 1741-1764, October.
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Citations

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Cited by:
  1. Bental, Benjamin & Demougin, Dominique, 2010. "Declining labor shares and bargaining power: An institutional explanation," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 443-456, March.
  2. Dominique Demougin & Anja Schöttner, 2010. "Technology adoption under hidden information," Journal of Economics, Springer, vol. 100(1), pages 1-18, May.
  3. Jürgen Jerger & Jochen Michaelis, 2010. "The Fixed Wage Puzzle: Why Profit Sharing Is So Hard to Implement," MAGKS Papers on Economics 201013, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  4. Straub, Stephane, 2008. "Infrastructure and development : a critical appraisal of the macro level literature," Policy Research Working Paper Series 4590, The World Bank.
  5. Dominique Demougin & Claude Fluet & Carsten Helm, 2004. "Output and Wages with Inequality Averse Agents," Cahiers de recherche 0419, CIRPEE.
  6. Lamarche, Carlos, 2013. "Industry-Wide Work Rules and Productivity: Evidence from Argentine Union Contract Data," IZA Discussion Papers 7673, Institute for the Study of Labor (IZA).
  7. Abián García-Rodríguez & Fernando Sánchez-Losada, 2014. "R&D poverty traps," UB Economics Working Papers 2014/307, Universitat de Barcelona, Facultat d'Economia i Empresa, UB Economics.
  8. Benjamin Bental & Dominique Demougin, 2006. "Institutions, Bargaining Power and Labor Shares," SFB 649 Discussion Papers SFB649DP2006-009, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

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