"Motivating devoted workers"
JEL codes: L14, L23, L33
Keywords: contracts, organization of production, privatization
Abstract: When increased effort by a worker induces an employer to reduce its use of other inputs, inefficiency may result. In particular, suppose that output increases with the worker's effort, that a worker exerts extra effort because he values the output produced beyond the wage he earns, that output increases with the capital the employer provides, and that these levels are not verifiable. Under plausible conditions output is lower if the employer can commit to a level of capital than if it cannot. If the employer cannot commit, then output may decline as the worker values the output more. When the employer pays the worker for increased output, output may be lower when the worker values it than when he does not. Lastly, efficiency may increase when a firm is paid more for a unit of output than its marginal social value, and when the employer can commit to using a given level of other inputs.