Incentive contracts and total factor productivity

Benjamin Bental, Dominique Demougin

Research output: Contribution to journalArticlepeer-review


We propose a transactions cost theory of total factor productivity (TFP). In a world with asymmetric information and transactions costs, productivity must be induced by incentive schemes. Labor contracts trade off marginal benefits and costs of effort. The latter include, in addition to the workers' marginal disutility of effort, organizational costs and rents. As the economy grows, contracts change endogenously, inducing higher effort and productivity. Transactions costs are also affected by societal characteristics that determine the power of incentives. Differences in these characteristics may explain cross-economy productivity differences. Numerical experiments demonstrate the model's consistency with time-series and cross-country observations.

Original languageEnglish
Pages (from-to)1033-1055
Number of pages23
JournalInternational Economic Review
Issue number3
StatePublished - Aug 2006

ASJC Scopus subject areas

  • Economics and Econometrics


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