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Making a difference
Author(s) -
Francois Patrick
Publication year - 2007
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/j.0741-6261.2007.00108.x
Subject(s) - incentive , free riding , economics , public good , wage , compensation (psychology) , microeconomics , labour economics , private good , outcome (game theory) , incentive compatibility , psychology , psychoanalysis
Despite the potential for free‐riding, workers motivated by “making a difference” to the mission or output of an establishment may donate labor to it. When the establishment uses performance‐related compensation (PRC), these labor donations closely resemble a standard private provision of public goods problem, and are not rational in large labor pools. Without PRC, however, the problem differs significantly from a standard private provision of public goods situation. Specifically, in equilibrium, there need not be free‐riding, decisions are non‐monotonic in valuations, and contribution incentives are significant even in large populations. When PRC is not used, the establishment tends to favor setting low wages, which helps to select a labor force driven by concern for the firm's output. Expected output can actually fall with the wage in this situation. When wages are optimally set, the introduction of PRC, even if perfect and costless, may lower expected output and firm profits in comparison to the non‐PRC outcome.