INCENTIVE CONTRACTS AND TOTAL FACTOR PRODUCTIVITY*

Incentive contracts and unemployment

We study a labour market in which ...rms can observe workers’ output but not their e¤ort, and in which a worker’s productivity in a given ...rm depends on a worker-...rm speci...c component, unobservable for the ...rm. Firms o¤er wage contracts that optimally trade o¤ effort and wage costs. As a result, employed workers enjoy rents, which in turn create unemployment. We show that the incentive ...

Total Factor Productivity∗

Total Factor Productivity (TFP) is the portion of output not explained by the amount of inputs used in production. The following definition describes the measurement and importance of TFP for growth, fluctuations and development as well as likely future directions of research. Total Factor Productivity (TFP) is the portion of output not explained by the amount of inputs used in production. As s...

Bubbles and Total Factor Productivity

Evidence shows that asset price bubbles typically precede financial crises and financial crises are accompanied by the collapse of bubbles. In addition, stock market booms and busts are typically associated with credit market booms and busts. The recent US housing and stock market bubbles and the subsequent Great Recession that began in late 2007 provide an example. The stock market booms in th...

Efficient Incentive Contracts

A so-called "incentive contract" is a linear payment schedule, where the buyer pays a fixed fee plus some proportion of audited project cost. That remaining proportion of project cost borne by the seller is called the "sharing ratio." A higher sharing ratio creates more incentive to reduce costs. But it also makes the agent bear more cost uncertainty, requiring as compensation a greater fixed f...

Incentive Contracts and Performance Measurement