High Compensation Creates a Ratchet Effect

Arbeitspapier

We consider a firm which pays a worker for his effort over several periods. The more the firm pays in one period, the wealthier the worker is in the following periods, and so the more he must be paid for a given effort. This wealth effect can induce an employer to pay little initially and more later on. For related reasons, the worker may work harder than the employer prefers. The incentive contracts firms offer may therefore cap the worker?s earnings. Lastly, this wealth ratchet effect can induce excessive firing and turnover.

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• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IZA Discussion Papers ; No. 1143

Classification and Topics

• Classification: Wirtschaft ; Mobility, Unemployment, Vacancies, and Immigrant Workers: General ; Wages, Compensation, and Labor Costs: General ; Information, Knowledge, and Uncertainty: General
• Subject: principal-agent ; compensation ; moral hazard ; wealth effects ; Ratchet effects ; high-powered incentives ; Vergütungssystem ; Anreizvertrag ; Leistungsmotivation ; Vermögenseffekt ; Arbeitsmobilität ; Agency Theory ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Glazer, Amihai ; Gersbach, Hans
• Event: Veröffentlichung
• (who): Institute for the Study of Labor (IZA)
• (where): Bonn
• (when): 2004

Further information

• Handle: http://hdl.handle.net/10419/20380