Wealth Effects, Incentives and Productivity


Posted: 11 Dec 1996

See all articles by Dilip Mookherjee

Dilip Mookherjee

Boston University - Department of Economics


Comparative static effects of varying the wealth level of risk averse agent in a moral hazard setting with limited liability constraints are investigated. There are two principal opposing effects of increasing wealth: the incentive effect, which allows stronger punishments for poor performance, thereby encouraging higher effort; and the preference effect, which reduces the agent's effort incentives owing to income effects in the demand for leisure. It is shown that optimal effort levels are initially constant, subsequently increasing and eventually decreasing in wealth. Hence agents with intermediate wealth levels are the most productive.

JEL Classification: D23, D45, D82, O12, Q15

Suggested Citation

Mookherjee, Dilip, Wealth Effects, Incentives and Productivity. REVIEW OF DEVELOPMENT ECONOMICS, Available at SSRN: https://ssrn.com/abstract=3592

Dilip Mookherjee (Contact Author)

Boston University - Department of Economics ( email )

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