%0 Report
        %A Schnedler, Wendelin
        %T You Don't Always Get What You Pay For
        %D 2007
        %8 2007 Sep
        %I Institute of Labor Economics (IZA)
        %C Bonn
        %7 IZA Discussion Paper
        %N 3077
        %U https://www.iza.org/index.php/publications/dp3077
        %X Consider a principal-agent relationship in which more effort by the agent raises the likelihood of success. Does rewarding success, i.e., paying a bonus, increase effort in this case? I find that bonuses have not only an incentive but also an income effect. Overall, bonuses paid for success may well reduce effort and hence the probability of success. I also identify conditions under which the income effect dominates the incentive effect, and single out the hazard-rate of effort as a crucial determinant of this trade-off.
        %K moral hazard
%K bonus
%K premium
%K incentives
%K income effect