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Incentive Contracts and Total Factor Productivity

Dominique Demougin () and Benjamin Bental

No 2004,41, Papers from Humboldt University of Berlin, Center for Applied Statistics and Economics (CASE)

Abstract: 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.

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: 2004
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Related works:
Journal Article: INCENTIVE CONTRACTS AND TOTAL FACTOR PRODUCTIVITY (2006) Downloads
Working Paper: Incentive Contracts and Total Factor Productivity (2003) Downloads
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