Status Incentives with Discrete Effort: A Note

Using a moral hazard framework with limited liability with discrete effort levels we show that status incentives help in partially reducing the burden on monetary incentives. Yet, the disutility accruing from failure to achieve status dampens the efficiency of status as an incentive. The optimal bonus is independent of the return of the firm. Again, the optimal expected payoff of the agent decreases with an increase in the utility from status whereas exactly opposite happens when disutility from disgrace of failing to achieve status, increase. Thus this paper re-examines Besley and Ghatak (2008) when effort level is discrete.