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Incentive Contracts and Total Factor Productivity

Author

Listed:
  • Demougin, Dominique M.
  • Bental, Benjamin
Abstract
This paper proposes a transactions cost theory of total factor productivity. In a world with asymmetric information and transactions costs, effort, and thus productivity, must be induced by incentive schemes. Labor contracts trade off the marginal benefits and the marginal costs of effort. The latter include, in addition to the workers? marginal disutility of effort, also organizational costs and rents. As the economy grows, the optimal contracts change endogenously, inducing higher effort and measured productivity. Transactions costs are also affected by societal characteristics that determine the power of incentive contracts. Therefore, differences in these characteristics may explain cross-economy productivity differences. Numerical experiments demonstrate that the model is consistent both with time series and cross-country observations.

Suggested Citation

  • Demougin, Dominique M. & Bental, Benjamin, 2004. "Incentive Contracts and Total Factor Productivity," Papers 2004,41, Humboldt University of Berlin, Center for Applied Statistics and Economics (CASE).
    • Handle: RePEc:zbw:caseps:200441
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    References listed on IDEAS

    as
    1. Dominique Demougin & Claude Fluet, 1998. "Mechanism Sufficient Statistic in the Risk-Neutral Agency Problem," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 154(4), pages 622-622, December.
    2. Shi, Shouyong, 1998. "Search for a Monetary Propagation Mechanism," Journal of Economic Theory, Elsevier, vol. 81(2), pages 314-352, August.
    3. Edward C. Prescott & Stephen L. Parente, 1999. "Monopoly Rights: A Barrier to Riches," American Economic Review, American Economic Association, vol. 89(5), pages 1216-1233, December.
    4. Prescott, Edward C, 1998. "Needed: A Theory of Total Factor Productivity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 525-551, August.
    5. Robert E. Hall & Charles I. Jones, 1999. "Why do Some Countries Produce So Much More Output Per Worker than Others?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(1), pages 83-116.
    6. Narayana R. Kocherlakota, 2001. "Building blocks for barriers to riches," Staff Report 288, Federal Reserve Bank of Minneapolis.
    7. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
    8. Demougin, Dominique & Fluet, Claude, 2001. "Monitoring versus incentives," European Economic Review, Elsevier, vol. 45(9), pages 1741-1764, October.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Jerger, Jürgen & Michaelis, Jochen, 2011. "The fixed wage puzzle: Why profit sharing is so hard to implement," Economics Letters, Elsevier, vol. 110(2), pages 104-106, February.
    2. Hernando Zuleta, 2015. "Getting Growth Accounting Right," Documentos CEDE 13814, Universidad de los Andes, Facultad de Economía, CEDE.
    3. Stephane Straub, 2011. "Infrastructure and Development: A Critical Appraisal of the Macro-level Literature," Journal of Development Studies, Taylor & Francis Journals, vol. 47(5), pages 683-708.
    4. Dominique Demougin & Claude Fluet & Carsten Helm, 2006. "Output and wages with inequality averse agents," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 39(2), pages 399-413, May.
    5. Dominique Demougin & Anja Schöttner, 2010. "Technology adoption under hidden information," Journal of Economics, Springer, vol. 100(1), pages 1-18, May.
    6. Xiaoying Li & Yin-Fang Zhang & Laixiang Sun, 2018. "Industry Agglomeration, Sub-National Institutions and the Profitability of Foreign Subsidiaries," Management International Review, Springer, vol. 58(6), pages 969-993, December.
    7. Matthias Kräkel, 2008. "On Adverse Selection of Technologies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(2), pages 343-355, June.
    8. Abián García-Rodríguez & Fernando Sánchez-Losada, 2014. "R&D poverty traps," UB School of Economics Working Papers 2014/307, University of Barcelona School of Economics.
    9. Carlos Lamarche, 2013. "Industry-wide work rules and productivity: evidence from Argentine union contract data," IZA Journal of Labor & Development, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 2(1), pages 1-25, December.
    10. Bental, Benjamin & Demougin, Dominique, 2010. "Declining labor shares and bargaining power: An institutional explanation," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 443-456, March.
    11. repec:hum:wpaper:sfb649dp2006-009 is not listed on IDEAS
    12. Bental, Benjamin & Demougin, Dominique M., 2006. "Institutions, bargaining power and labor shares," SFB 649 Discussion Papers 2006-009, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    13. Nicoleta Georgeta Panait & Costin Alexandru Panait, 2018. "An Empirical Study on Public Debit in Romania," Global Economic Observer, "Nicolae Titulescu" University of Bucharest, Faculty of Economic Sciences;Institute for World Economy of the Romanian Academy, vol. 6(1), June.

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    More about this item

    Keywords

    incentive contracts; total factor productivity; economic growth;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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