Resource title

High Compensation Creates a Ratchet Effect

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Resource description

We consider a firm which pays a worker for his effort over several periods. The more the firm pays in one period, the wealthier the worker is in the following periods, and so the more he must be paid for a given effort. This wealth effect can induce an employer to pay little initially and more later on. For related reasons, the worker may work harder than the employer prefers. The incentive contracts firms offer may therefore cap the worker?s earnings. Lastly, this wealth ratchet effect can induce excessive firing and turnover.

Resource author

Amihai Glazer, Hans Gersbach

Resource publisher

Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/20380

Resource license

Adapt according to the presented license agreement and reference the original author.