Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/127276
Authors: 
Schnedler, Wendelin
Year of Publication: 
2007
Series/Report no.: 
Discussion Paper Series, University of Heidelberg, Department of Economics 452
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
JEL: 
D8
J3
M5
Document Type: 
Working Paper

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