Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/20380 
Year of Publication: 
2004
Series/Report no.: 
IZA Discussion Papers No. 1143
Publisher: 
Institute for the Study of Labor (IZA), Bonn
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.
Subjects: 
principal-agent
compensation
moral hazard
wealth effects
Ratchet effects
high-powered incentives
JEL: 
J60
J30
D80
Document Type: 
Working Paper

Files in This Item:
File
Size
395.76 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.