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Effort as Investment: Analyzing the Response to Incentives

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  • Friedman, John N.

    (Harvard U)

  • Kelman, Steven

Abstract

We analyze a model in which incentives in one period on one task can affect output more broadly through learning. If agents can invest in human or organizational capital, then output will increase both before and after short-term incentives. We develop a model of these e¤ects, and then we evaluate its predictions using data from hospitals in Britain during a series of limited-time performance incentives offered by the government. We …nd empirically that these policies increase performance not only during the incentivized periods but also before and after, matching the preditctions of our model. We also examine performance along non-incentivized dimensions of quality of care and find little evidence of classical effort substitution.

Suggested Citation

  • Friedman, John N. & Kelman, Steven, 2007. "Effort as Investment: Analyzing the Response to Incentives," Working Paper Series rwp07-024, Harvard University, John F. Kennedy School of Government.
  • Handle: RePEc:ecl:harjfk:rwp07-024
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    File URL: https://research.hks.harvard.edu/publications/workingpapers/citation.aspx?PubId=4861&type=WPN
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    References listed on IDEAS

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    1. David Dranove & Daniel Kessler & Mark McClellan & Mark Satterthwaite, 2003. "Is More Information Better? The Effects of "Report Cards" on Health Care Providers," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 555-588, June.
    2. Paul Oyer, 1998. "Fiscal Year Ends and Nonlinear Incentive Contracts: The Effect on Business Seasonality," The Quarterly Journal of Economics, Oxford University Press, vol. 113(1), pages 149-185.
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    4. Uri Gneezy & Aldo Rustichini, 2000. "Pay Enough or Don't Pay at All," The Quarterly Journal of Economics, Oxford University Press, vol. 115(3), pages 791-810.
    5. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    6. Stephen Morris & Stephen Coate, 1999. "Policy Persistence," American Economic Review, American Economic Association, vol. 89(5), pages 1327-1336, December.
    7. Jeremy C. Stein, 1989. "Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 655-669.
    8. Kenneth J. Arrow, 1962. "The Economic Implications of Learning by Doing," Review of Economic Studies, Oxford University Press, vol. 29(3), pages 155-173.
    9. McNichols, Maureen F., 2000. "Research design issues in earnings management studies," Journal of Accounting and Public Policy, Elsevier, vol. 19(4-5), pages 313-345.
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    11. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
    12. Heckman, James J & Heinrich, Carolyn & Smith, Jeffrey, 1997. "Assessing the Performance of Performance Standards in Public Bureaucracies," American Economic Review, American Economic Association, vol. 87(2), pages 389-395, May.
    13. Milton Harris & Bengt Holmstrom, 1982. "A Theory of Wage Dynamics," Review of Economic Studies, Oxford University Press, vol. 49(3), pages 315-333.
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    Cited by:

    1. Propper, Carol & Sutton, Matt & Whitnall, Carolyn & Windmeijer, Frank, 2010. "Incentives and targets in hospital care: Evidence from a natural experiment," Journal of Public Economics, Elsevier, pages 318-335.

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    JEL classification:

    • D20 - Microeconomics - - Production and Organizations - - - General

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