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Incentives, ability and disutility of effort
- Source :
- SERIEs. 12:453-487
- Publication Year :
- 2021
- Publisher :
- Springer Science and Business Media LLC, 2021.
-
Abstract
- We generalize the disutility of effort function in the linear-Constant Absolute Risk Aversion (CARA) pure moral hazard model. We assume that agents are heterogeneous in ability. Each agent’s ability is observable and treated as a parameter that indexes the disutility of effort associated with the task performed. In opposition to the literature (the “traditional” scenario), we find a new, “novel” scenario, in which a high-ability agent may be offered a weaker incentive contract than a low-ability one, but works harder. We characterize the conditions for the existence of these two scenarios: formally, the “traditional” (“novel”) scenario occurs if and only if the marginal rate of substitution of the marginal disutility of effort function is increasing (decreasing) in effort when evaluated at the second-best effort. If, further, this condition holds for all parameter values and matching is endogenous, less (more) talented agents work for principals with riskier projects in equilibrium. This implies that the indirect and total effects of risk on incentives are negative under monotone assortative matching.
- Subjects :
- Matching (statistics)
050208 finance
Moral hazard
media_common.quotation_subject
05 social sciences
Marginal rate of substitution
Task (project management)
Microeconomics
Monotone polygon
Incentive
0502 economics and business
Economics
050207 economics
Function (engineering)
General Economics, Econometrics and Finance
Public finance
media_common
Subjects
Details
- ISSN :
- 18694195 and 18694187
- Volume :
- 12
- Database :
- OpenAIRE
- Journal :
- SERIEs
- Accession number :
- edsair.doi...........84f7d370eed50ae5604d342d3061cb96