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http://hdl.handle.net/10419/34582
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| Title: | | You don't always get what you pay for  |
| 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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