Incentives in Markets, Firms, and Governments

Posted: 16 Sep 2008

See all articles by Daron Acemoglu

Daron Acemoglu

Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Michael Kremer

Harvard University - Department of Economics; Brookings Institution; National Bureau of Economic Research (NBER); Center for Global Development; Harvard University - Harvard Kennedy School (HKS)

Atif R. Mian

Princeton University - Department of Economics; Princeton University - Woodrow Wilson School of Public and International Affairs; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: October 2008

Abstract

We construct a simple career concerns model where high-powered incentives can distort the composition of effort by inducing excessive signaling. We show that in the presence of this type of career concerns, markets typically fail to limit competitive pressures and cannot commit to the desirable low-powered incentives. Firms may be able to weaken incentives and improve efficiency by obscuring information about individual workers' contribution to output, and thus reducing their willingness to signal through a moral-hazard-in-teams reasoning. However, firms themselves have a commitment problem, since firm owners would like to provide high-powered incentives to their employees to increase profits. When firms cannot refrain from doing so, government provision may be useful as a credible commitment to low-powered incentives. Governments may be able to achieve this even when operated by a self-interested politician. Among other reasons, this may happen because of the government's ability to limit yardstick competition and reelection uncertainty. We discuss possible applications of our theory to pervasive government involvement in predominantly private goods such as education and management of pension funds. (JEL D23, L22, H10, H52)

Suggested Citation

Acemoglu, Daron and Kremer, Michael R. and Mian, Atif R., Incentives in Markets, Firms, and Governments (October 2008). The Journal of Law, Economics, & Organization, Vol. 24, Issue 2, pp. 273-306, 2008. Available at SSRN: https://ssrn.com/abstract=1268651 or http://dx.doi.org/10.1093/jleo/ewm055

Daron Acemoglu (Contact Author)

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Michael R. Kremer

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Atif R. Mian

Princeton University - Department of Economics ( email )

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Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

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