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Title:Incentive Contracts and Total Factor Productivity PDF Logo
Authors:Demougin, Dominique M.
Bental, Benjamin
Issue Date:2004
Series/Report no.:Papers / Humboldt-Universität Berlin, Center for Applied Statistics and Economics (CASE) 2004,41
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.
Subjects:incentive contracts
total factor productivity
economic growth
JEL:D82
O40
Document Type:Working Paper
Appears in Collections:Papers, CASE - Center for Applied Statistics and Economics, HU Berlin

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