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Wealth Effects, Incentives and Productivity

Dilip Mookherjee

Boston University - Institute for Economic Development from Boston University, Institute for Economic Development

Abstract: Comparative static effects of varying the wealth level of a risk averse agent in a moral hazard setting with limited liability constraints are investigated. There are two principal opposing effects of increasing wealth: the incentive effect which allows stronger punishments for poor performance, thereby encouraging higher effort; and the preference effect, which reduces the agent's effort incentives owing to income effects in the demand for leisure. It is shown that optimal effort levels are initially constant, subsequently increasing and eventually decreasing in wealth. Hence agents with intermediate walth levels are the most productive.

Date: 1997-01
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Citations: View citations in EconPapers (13)

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