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The Tenuous Relationship between Effort and Performance Pay

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  • Kvaløy, Ola

    (UiS Business School, University of Stavanger)

  • Olsen, Trond E.

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

Abstract

When a worker is offered performance related pay, the incentive effect is not only determined by the shape of the incentive contract, but also by the probability of contract enforcement. We show that weaker enforcement may reduce the worker's effort, but lead to higher-powered incentive contracts. This creates a seemingly negative relationship between effort and performance pay.

Suggested Citation

  • Kvaløy, Ola & Olsen, Trond E., 2012. "The Tenuous Relationship between Effort and Performance Pay," Discussion Papers 2012/8, Norwegian School of Economics, Department of Business and Management Science.
    • Handle: RePEc:hhs:nhhfms:2012_008
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    File URL: http://hdl.handle.net/11250/164200
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    1. On the negative correlation between effort and pay
      by Economic Logician in Economic Logic on 2012-06-29 20:49:00

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    1. Schmitz, Patrick W., 2015. "Government versus private ownership of public goods: The role of bargaining frictions," Journal of Public Economics, Elsevier, vol. 132(C), pages 23-31.

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    More about this item

    Keywords

    Effort; performance pay; incentive contract;
    All these keywords.

    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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