High Compensation Creates a Ratchet Effect

Hans Gersbach and Amihai Glazer

No 1143, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We consider a firm which pays a worker for his effort over several periods. The more the firm pays in one period, the wealthier the worker is in the following periods, and so the more he must be paid for a given effort. This wealth effect can induce an employer to pay little initially and more later on. For related reasons, the worker may work harder than the employer prefers. The incentive contracts firms offer may therefore cap the worker’s earnings. Lastly, this wealth ratchet effect can induce excessive firing and turnover.

Keywords: wealth effects; Ratchet effects; moral hazard; compensation; principal-agent; high-powered incentives (search for similar items in EconPapers)
JEL-codes: D80 J30 J60 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2004-05
New Economics Papers: this item is included in nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published - published in: Economic Journal, 2009, 119 (539), 1208 - 1224

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Journal Article: High Compensation Creates a Ratchet Effect (2009)
Journal Article: High Compensation Creates a Ratchet Effect (2009)
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