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Title:You don't always get what you pay for PDF Logo
Authors:Schnedler, Wendelin
Issue Date:2007
Series/Report no.:IZA Discussion Papers 3077
Abstract:Consider a principal-agent relationship in which more effort by the agent raises the likelihood of success. Does rewarding success, i.e., paying a bonus, increase effort in this case? I find that bonuses have not only an incentive but also an income effect. Overall, bonuses paid for success may well reduce effort and hence the probability of success. I also identify conditions under which the income effect dominates the incentive effect, and single out the hazard-rate of effort as a crucial determinant of this trade-off.
Subjects:Bonus
premium
incentives
income effect
moral hazard
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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