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Improving the Effort Concept: A Revision of the Traditional Approach in the Context of Controlled Dynamic Stochastic Environments

  • PROTOPOPESCU DAN

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    The objective of this paper is to re-evaluate the attitude to effort of a risk-averse decision- maker in an evolving environment. In the classical analysis, the space of efforts is generally discretized. More realistic, this new approach employes a continuum of effort levels. The pres- ence of multiple possible efforts and performance levels provide a better basis for explaining real economic phenomena. In the context of a principal-agent relationship, not only the incentives of the Principal can determine the private agent to exert a good effort, but also the evolution of the dynamic system. The dynamic incentives can be ineffective when the environment does not sufficiently incite the agent to allocate effort. This possible scenario explains why some efficient strategic incentive-compatible constraints that cover the entire period of contract do not generally exist. The proposed approach offers an elegant study of the close relationship between behavior, attitude and effort allocation.

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    Paper provided by Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) in its series UFAE and IAE Working Papers with number 739.08.

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    Length: 26
    Date of creation: 01 Apr 2008
    Date of revision: 03 Dec 2009
    Handle: RePEc:aub:autbar:739.08
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    1. repec:ner:tilbur:urn:nbn:nl:ui:12-364325 is not listed on IDEAS
    2. Kiefer, Nicholas M & Nyarko, Yaw, 1989. "Optimal Control of an Unknown Linear Process with Learning," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(3), pages 571-86, August.
    3. Stigler, George J & Becker, Gary S, 1977. "De Gustibus Non Est Disputandum," American Economic Review, American Economic Association, vol. 67(2), pages 76-90, March.
    4. Boadway, Robin & Cuff, Katherine & Marceau, Nicolas, 2003. "Redistribution and employment policies with endogenous unemployment," Journal of Public Economics, Elsevier, vol. 87(11), pages 2407-2430, October.
    5. Cantor, Richard M, 1988. "Work Effort and Contract Length," Economica, London School of Economics and Political Science, vol. 55(219), pages 343-53, August.
    6. van de Stadt, Huib & Kapteyn, Arie & van de Geer, Sara, 1985. "The Relativity of Utility: Evidence from Panel Data," The Review of Economics and Statistics, MIT Press, vol. 67(2), pages 179-87, May.
    7. Dan Protopopescu, 2007. "Improving the Risk Concept: A Revision of Arrow-Pratt Theory in the Context of Controlled Dynamic Stochastic Environments," UFAE and IAE Working Papers 727.08, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC), revised 03 Dec 2009.
    8. repec:cup:cbooks:9780521386975 is not listed on IDEAS
    9. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
    10. van der Ploeg, F., 1984. "Risk and linear-quadratic stabilization," Economics Letters, Elsevier, vol. 15(1-2), pages 73-78.
    11. Varian, Hal R., 1990. "Goodness-of-fit in optimizing models," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 125-140.
    12. Gilboa, Itzhak, 1989. "Expectation and Variation in Multi-period Decisions," Econometrica, Econometric Society, vol. 57(5), pages 1153-69, September.
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