You Don't Always Get What You Pay For

Wendelin Schnedler

No 3077, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Consider a principal-agent relationship in which more effort by the agent raises the likelihood of success. Does rewarding success, i.e., paying a bonus, increase effort in this case? I find that bonuses have not only an incentive but also an income effect. Overall, bonuses paid for success may well reduce effort and hence the probability of success. I also identify conditions under which the income effect dominates the incentive effect, and single out the hazard-rate of effort as a crucial determinant of this trade-off.

Keywords: moral hazard; bonus; premium; incentives; income effect (search for similar items in EconPapers)
JEL-codes: D8 J3 M5 (search for similar items in EconPapers)
Pages: 9 pages
Date: 2007-09
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published - published as ' You Don't Always Get What You Pay For: Bonuses, Perceived Income and Effort ' in: German Economic Review, 2011, 12 (1), 1 - 10

Downloads: (external link)
https://docs.iza.org/dp3077.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iza:izadps:dp3077

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte ().