Econ 483_Lecture 23_Drastic innovation_Contracts

Worker incentives suppose that work is hard exerting

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Unformatted text preview: gy, Evangelia Chalioti c A ll rights reserved. Worker incentives Suppose that work is hard (exerting e¤ort = disutility, ! Worker will minimize e¤ort, all else equal dU de < 0) Worker’ objectives may not align with the owner’ objectives. s s ! Worker will maximize own utility at cost of …rm pro…ts Lecture 23: Contracts, Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved. Firms need to elicit e¤ort from workers How do they do this? Tie …nancial reward to e¤ort (and/or ability) Fire if workers do not meet the minimum threshold Piece rates pay a worker according to a measure of R&D-output Lecture 23: Contracts, Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved. Piece-rate by another name Commission - e.g. % of sales Pro…t-sharing - % of …rm pro…ts (based on group e¤ort) Bonuses – “above and beyond” (individual and/or group) Lecture 23: Contracts, Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved. In textbooks Scotchmer, S., Innovation and Incentives, pages: 166 - 169 Lecture 23: Contracts, Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved....
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