Incentive Contracts and Total Factor Productivity

23 Pages Posted: 1 Mar 2007

See all articles by Benjamin Bental

Benjamin Bental

University of Haifa - Department of Economics

Dominique Demougin

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Governance & Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Abstract

We propose a transactions cost theory of total factor productivity (TFP). In a world with asymmetric information and transactions costs, productivity must be induced by incentive schemes. Labor contracts trade off marginal benefits and costs of effort. The latter include, in addition to the workers' marginal disutility of effort, organizational costs and rents. As the economy grows, contracts change endogenously, inducing higher effort and productivity. Transactions costs are also affected by societal characteristics that determine the power of incentives. Differences in these characteristics may explain cross-economy productivity differences. Numerical experiments demonstrate the model's consistency with time-series and cross-country observations.

Suggested Citation

Bental, Benjamin and Demougin, Dominique, Incentive Contracts and Total Factor Productivity. International Economic Review, Vol. 47, No. 3, pp. 1033-1055, August 2006, Available at SSRN: https://ssrn.com/abstract=920536 or http://dx.doi.org/10.1111/j.1468-2354.2006.00405.x

Benjamin Bental (Contact Author)

University of Haifa - Department of Economics ( email )

Haifa 31905
Israel

Dominique Demougin

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Governance & Economics ( email )

International University Schloss Reichartshausen
Campus Wiesbaden, Soehnleinstrasse 8A
Wiesbaden, 65201
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Muenchen, 81679
Germany

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