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Indiana University Bloomington

Doctoral Programs

1960 Notable

From 1960-2013, we prepared nearly 1,200 men and women
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Journal Articles

Incentives, wages, employment, and the division of labor in teams

2014, The RAND Journal of Economics

M. T. Rauh

Abstract

We develop a theory of incentives, wages, and employment in the context of team production. A central insight is that specialization and division of labor not only improve productivity but also increase effort and the sensitivity of effort to incentives under moral hazard. We show that employment and incentives are complements for the principal when the positive effects of specialization and division of labor outweigh the increase in risk associated with additional employment and are substitutes otherwise. We provide new characterizations of the partnership, the firm, and the role of the budget-breaker that are quite different from the classical literature.

Citation

Rauh, Michael T. (2014) "Incentives, wages, employment, and the division of labor in teams," The RAND Journal of Economics, 45(3): 533-552.