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Incentive Contracts and Total Factor Productivity

  • Demougin, Dominique M.
  • Bental, Benjamin

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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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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  1. Shi Shouyong, 1997. "Search for a Monetary Propagation Mechanism," Working Papers 966, Queen's University, Department of Economics.
  2. 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.
  3. Prescott, Edward C, 1998. "Needed: A Theory of Total Factor Productivity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 525-51, August.
  4. Stephen L. Parente & Edward C. Prescott, 1997. "Monopoly rights: a barrier to riches," Staff Report 236, Federal Reserve Bank of Minneapolis.
  5. Demougin, Dominique & Fluet, Claude, 2001. "Monitoring versus incentives," European Economic Review, Elsevier, vol. 45(9), pages 1741-1764, October.
  6. Dominique Demougin & Claude Fluet, 1998. "Mechanism Sufficient Statistic in the Risk-Neutral Agency Problem," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 154(4), pages 622-, December.
  7. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
  8. Narayana R. Kocherlakota, 2001. "Building blocks for barriers to riches," Staff Report 288, Federal Reserve Bank of Minneapolis.
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