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Momentum and Incentive Intensity

By Yan Shi


This paper studies how an individual’s working habits may influence his incentives to choose a particular productive level when they make decisions on the job. In the paper, a dynamic model of a short-term labor contract under complete information is developed. The wage rates in each period are based on previous output levels and habit formation links current performance to future efforts. The optimal incentive contract demonstrates the combination of implicit incentives, where the firm sets the initial productive level for the worker in order to build a productive path for him, and explicit incentives from the wage rates offered by the firm. Thus the implicit incentives play an important role when the worker was previously non-productive because the productive habit, created by locking the worker into a productive path, leads him to the optimal working path which could never be reached when there was no fixed level of productivity

Year: 2015
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