Incentive Contracts and Total Factor Productivity
AbstractThis 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 InfoPaper provided by CIRPEE in its series Cahiers de recherche with number 0325.
Date of creation: 2003
Date of revision:
Incentive contracts; Total factor productivity; Economic growth;
Other versions of this item:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-06-16 (All new papers)
- NEP-DEV-2003-06-16 (Development)
- NEP-EFF-2003-07-29 (Efficiency & Productivity)
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