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Wealth Effects, Incentives, and Productivity

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  • Dilip Mookherjee

Abstract

Comparative static effects of varying the wealth level of a risk‐averse agent in a moral hazard setting with limited liability constraints are investigated. There are two principal opposing effects of increasing wealth: the incentive effect, which allows stronger punishments for poor performance, thereby encouraging higher effort; and the preference effect, which reduces the agent’s effort incentives owing to income effects in the demand for leisure. It is shown that optimal effort levels are initially constant, subsequently increasing and eventually decreasing in wealth. Hence agents with intermediate wealth levels are the most productive.

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  • Dilip Mookherjee, 1997. "Wealth Effects, Incentives, and Productivity," Review of Development Economics, Wiley Blackwell, vol. 1(1), pages 116-133, February.
    • Handle: RePEc:bla:rdevec:v:1:y:1997:i:1:p:116-133
    DOI: 10.1111/1467-9361.00009
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    Cited by:

    1. Brunnschweiler, Christa N. & Bulte, Erwin H., 2008. "The resource curse revisited and revised: A tale of paradoxes and red herrings," Journal of Environmental Economics and Management, Elsevier, vol. 55(3), pages 248-264, May.
    2. Dilip Mookherjee, 2006. "Decentralization, Hierarchies, and Incentives: A Mechanism Design Perspective," Journal of Economic Literature, American Economic Association, vol. 44(2), pages 367-390, June.
    3. Schnedler Wendelin, 2011. "You Don’t Always Get What You Pay For: Bonuses, Perceived Income and Effort," German Economic Review, De Gruyter, vol. 12(1), pages 1-10, February.
    4. Ulf von Lilienfeld-Toal & Dilip Mookherjee, 2005. "Bankruptcy Law, Bonded Labor And Inequality," Boston University - Department of Economics - Working Papers Series WP2005-035, Boston University - Department of Economics.
    5. Ni, Shawn & Van, Pham Hoang, 2006. "High corruption income in Ming and Qing China," Journal of Development Economics, Elsevier, vol. 81(2), pages 316-336, December.
    6. Thiele, Henrik & Wambach, Achim, 1999. "Wealth Effects in the Principal Agent Model," Journal of Economic Theory, Elsevier, vol. 89(2), pages 247-260, December.
    7. Günther G. Schulze & Bambang Suharnoko Sjahrir & Nikita Zakharov, 2016. "Corruption in Russia," Journal of Law and Economics, University of Chicago Press, vol. 59(1), pages 135-171.
    8. Perroni, Carlo & Proto, Eugenio, 2010. "Entrepreneurial drain under moral hazard: A high-yield sector curse?," Journal of Development Economics, Elsevier, vol. 93(1), pages 63-70, September.
    9. Perroni, Carlo & Proto, Eugenio, 2007. "Moral Hazard and Entrepreneurial Failure in a Two-sector Model of Productive Matching - with an Application to the Natural Resource Curse," The Warwick Economics Research Paper Series (TWERPS) 796, University of Warwick, Department of Economics.

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