ECO 3123 Study Guide - Final Guide: Occupational Segregation, Free Rider Problem, Efficiency Wage
14 Dec 2016
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How to compensate workers to encourage productivity. Productivity is more than just a function of innate ability, training, and capital equipment. Motivating people by pay is different for different jobs. There are benefits and costs of each compensation scheme. (cid:862)p(cid:396)i(cid:374)(cid:272)ipal-age(cid:374)t(cid:863) (cid:396)elatio(cid:374)ship: principal- employer, agent- worker, they do not always have the same objectives. Want to ensure the alignment of objectives in the principal-agent relationship. Employers will hire up to the point that mp(l)= mc. Productivity and especially effort can be hard to measure. There is asymmetric information in the principal agent relationship so pay schemes are employed to reduce the risk of employees shirking on effort/motivation. Contracts of compensation: both formal and implicit. Reputation based: motivation, aligning the efforts with firm intent, must measure and reward what you want. If firm just pays straight salary regardless of effort, workers will produce nothing.
