Incentive Contracts and Total Factor Productivity

Benjamin Bental and Dominique Demougin ()

Cahiers de recherche from CIRPEE

Abstract: This paper focuses on the endogenous determination of effort as a source of productivity growth. The economy is populated by infinitely lived households. Every period, members of each household may choose whether to be self-employed or become employees in a "corporate sector". Labor relations in the corporate sector are characterized by a double-moral hazard problem. To induce effort, the optimal labor contract stipulates for a bonus. Nevertheless, due to double moral hazard, employees extract some rents. As the economy grows, employees' rents increase, thereby raising the marginal benefit of monitoring. The ensuing changes in the optimal labor contract induce higher effort along the growth path. The model creates an endogenous association between growth and total factor productivity, and demonstrates that substantial cross-country productivity differences may be ascribed to differences in incentive structures.

Keywords: Incentive contracts; Total factor productivity; Economic growth (search for similar items in EconPapers)
JEL-codes: D82 O40 (search for similar items in EconPapers)
Date: 2003
New Economics Papers: this item is included in nep-dev and nep-eff
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: INCENTIVE CONTRACTS AND TOTAL FACTOR PRODUCTIVITY (2006)
Working Paper: Incentive Contracts and Total Factor Productivity (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:0325

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