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Title:High Compensation Creates a Ratchet Effect PDF Logo
Authors:Glazer, Amihai
Gersbach, Hans
Issue Date:2004
Series/Report no.:IZA Discussion paper series 1143
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
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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