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Incentives in Markets, Firms and Governments

  • Daron Acemoglu
  • Michael Kremer
  • Atif Mian

Most government expenditure is on goods that yield primarily private benefits, such as education, pensions, and healthcare. We argue that markets are most advantageous in areas where high-powered incentives are desirable, but in areas where high-powered incentives stimulate unproductive signalling effort, firms, or even government, may have a comparative advantage. Firms may be able to weaken incentives and improve efficiency by obscuring information about individual workers' contribution to output, and thus reducing their willingness to signal through a moral-hazard-in-teams reasoing. However, firms themselves may be unable to commit to not providing greater compensation to employees who distort their effots to improve observed performance. Government organizations, on the other hand, often have to flatter wage schedules, thereby naturally weakening the power of incentives. We suggest that there are also endogenous reasons for why governments, even when they are run by self-interested politicians, may be able to commit to lower powered incentives than firms, because government operation makes yardstick comparisons, which increase the power of incentives, more difficult.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9802.

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Date of creation: Jun 2003
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Publication status: published as Acemoglu, Daron, Michael Kremer, and Atif Mian. "Incentives in Markets, Firms and Governments." Journal of Law, Economics and Organizations(December 2007).
Handle: RePEc:nbr:nberwo:9802
Note: EFG LS
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