Effort and Incentives at a Software Firm

Within the framework of the relationship between a firm and its employee, which statement best explains why the employee's decision on how hard to work generates an external effect for the firm?

Evaluating Modern Workflows through a Classical Lens

The Uncontracted Benefit of Worker Effort

The Uncontracted Benefit of Worker Effort

In a principal-agent scenario between an employer and an employee, if the employer could perfectly and costlessly observe the employee's level of effort, the positive external effect of that effort on the firm's profit would be eliminated.

The Market-Level Consequence of Uncontracted Effort

A manufacturing firm is concerned that its employees, paid a fixed hourly wage, are not working as hard as they could. To address this, the firm switches to a piece-rate system where workers are paid for each unit they produce, and the quality of each unit is easily verifiable. From an economic perspective, why is this change in compensation likely to resolve the problem of the worker's effort creating an uncompensated benefit for the firm?

Match each economic concept to its specific role within the model of the employer-employee relationship where worker effort is not perfectly observable.

Comparing Compensation Strategies