Incentives in Markets, Firms and Governments

46 Pages Posted: 23 Jun 2003 Last revised: 28 Jun 2003

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: June 2003

Abstract

Most government expenditure is on goods that yield primarily private benefits, such as education, pensions, and healthcare. We argue that markets are most advantageous in areas where high-powered incentives are desirable, but in areas where high-powered incentives stimulate unproductive signalling effort, firms, or even government, may have a comparative advantage. 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 reasoing. However, firms themselves may be unable to commit to not providing greater compensation to employees who distort their effots to improve observed performance. Government organizations, on the other hand, often have to flatter wage schedules, thereby naturally weakening the power of incentives. We suggest that there are also endogenous reasons for why governments, even when they are run by self-interested politicians, may be able to commit to lower powered incentives than firms, because government operation makes yardstick comparisons, which increase the power of incentives, more difficult.

Suggested Citation

Acemoglu, Daron and Kremer, Michael R. and Mian, Atif R., Incentives in Markets, Firms and Governments (June 2003). NBER Working Paper No. w9802. Available at SSRN: https://ssrn.com/abstract=418304

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Atif R. Mian

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

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