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Push or pull? Performance pay, incentives, and information

Research output: Working paper

Published
Publication date09/2016
Place of PublicationLancaster
PublisherLancaster University, Department of Economics
<mark>Original language</mark>English

Publication series

NameEconomics Working Paper Series

Abstract

We study a principal-agent model wherein the agent is better informed of the prospects of the project, and the project requires both an observable and unobservable input. We show (1) Performance pay may not be optimal, even if output is the only informative signal of an essential input; (2) Total surplus tends to be higher if one input is unobservable than if both inputs are observable; and (3) Bunching may arise amongst low and intermediate types. We explore the implications for push and pull programs used to encourage R&D activity, but our results have applications beyond this context.