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Incentive Contracts and Total Factor Productivity

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  • Demougin, Dominique M.
  • Bental, Benjamin

Abstract

This paper proposes a transactions cost theory of total factor productivity. In a world with asymmetric information and transactions costs, effort, and thus productivity, must be induced by incentive schemes. Labor contracts trade off the marginal benefits and the marginal costs of effort. The latter include, in addition to the workers? marginal disutility of effort, also organizational costs and rents. As the economy grows, the optimal contracts change endogenously, inducing higher effort and measured productivity. Transactions costs are also affected by societal characteristics that determine the power of incentive contracts. Therefore, differences in these characteristics may explain cross-economy productivity differences. Numerical experiments demonstrate that the model is consistent both with time series and cross-country observations. --

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Bibliographic Info

Paper provided by Humboldt-Universität Berlin, Center for Applied Statistics and Economics (CASE) in its series Papers with number 2004,41.

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Date of creation: 2004
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Handle: RePEc:zbw:caseps:200441

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Keywords: incentive contracts; total factor productivity; economic growth;

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References

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  1. Edward C. Prescott, 1997. "Needed: a theory of total factor productivity," Staff Report 242, Federal Reserve Bank of Minneapolis.
  2. Demougin, Dominique & Fluet, Claude, 2001. "Monitoring versus incentives," European Economic Review, Elsevier, vol. 45(9), pages 1741-1764, October.
  3. Shi, Shouyong, 1998. "Search for a Monetary Propagation Mechanism," Journal of Economic Theory, Elsevier, vol. 81(2), pages 314-352, August.
  4. Narayana R. Kocherlakota, 2001. "Building blocks for barriers to riches," Staff Report 288, Federal Reserve Bank of Minneapolis.
  5. Stephen L. Parente & Edward C. Prescott, 1997. "Monopoly rights: a barrier to riches," Staff Report 236, Federal Reserve Bank of Minneapolis.
  6. Dominique Demougin & Claude Fluet, 1996. "Mechanism Sufficient Statistic in the Risk-Neutral Agency Problem," Cahiers de recherche du Département des sciences économiques, UQAM 9602, Université du Québec à Montréal, Département des sciences économiques.
  7. 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.
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Citations

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Cited by:
  1. Stephane Straub, 2011. "Infrastructure and Development: A Critical Appraisal of the Macro-level Literature," Journal of Development Studies, Taylor & Francis Journals, vol. 47(5), pages 683-708.
  2. Jerger , Jürgen & Michaelis, Jochen, 2010. "The Fixed Wage Puzzle: Why Profit Sharing Is So Hard to Implement," University of Regensburg Working Papers in Business, Economics and Management Information Systems 441, University of Regensburg, Department of Economics.
  3. Benjamin Bental & Dominique Demougin, 2006. "Institutions, Bargaining Power and Labor Shares," SFB 649 Discussion Papers SFB649DP2006-009, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  4. 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.
  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. Dominique Demougin & Anja Schöttner, 2010. "Technology adoption under hidden information," Journal of Economics, Springer, vol. 100(1), pages 1-18, May.

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