Premium
Wealth Effects, Incentives, and Productivity
Author(s) -
Mookherjee Dilip
Publication year - 1997
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/1467-9361.00009
Subject(s) - incentive , economics , productivity , moral hazard , preference , microeconomics , limited liability , wealth effect , labour economics , monetary economics , macroeconomics , finance , monetary policy
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.