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The Tenuous Relationship between Effort and Performance Pay

  • Kvaløy, Ola

    ()

    (UiS Business School, University of Stavanger)

  • Olsen, Trond E.

    ()

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

When a worker is offered performance related pay, the incentive effect is not only determined by the shape of the incentive contract, but also by the probability of contract enforcement. We show that weaker enforcement may reduce the worker's effort, but lead to higher-powered incentive contracts. This creates a seemingly negative relationship between effort and performance pay.

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File URL: http://hdl.handle.net/11250/164200
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Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2012/8.

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Length: 28 pages
Date of creation: 29 Jun 2012
Date of revision:
Handle: RePEc:hhs:nhhfms:2012_008
Contact details of provider: Postal: NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Phone: +47 55 95 92 93
Fax: +47 55 95 96 50
Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
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  1. Gary Charness & Martin Dufwenberg, 2004. "Promises and Partnership," Levine's Bibliography 122247000000000001, UCLA Department of Economics.
  2. Bull, Jesse & Watson, Joel, 2000. "Evidence Disclosure and Verifiability," University of California at San Diego, Economics Working Paper Series qt6th0060j, Department of Economics, UC San Diego.
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  8. Monika Schnitzer, 1994. "The Interaction of Explicit and Implicit Contracts," Discussion Paper Serie A 452, University of Bonn, Germany.
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  12. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October.
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  17. Steven Shavell, 2006. "On the Writing and the Interpretation of Contracts," Journal of Law, Economics and Organization, Oxford University Press, vol. 22(2), pages 289-314, October.
  18. Frey, Bruno S & Jegen, Reto, 2001. " Motivation Crowding Theory," Journal of Economic Surveys, Wiley Blackwell, vol. 15(5), pages 589-611, December.
  19. Roland Bénabou & Jean Tirole, 2003. "Intrinsic and Extrinsic Motivation," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 489-520.
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  21. Greif, Avner, 1994. "Cultural Beliefs and the Organization of Society: A Historical and Theoretical Reflection on Collectivist and Individualist Societies," Journal of Political Economy, University of Chicago Press, vol. 102(5), pages 912-50, October.
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