Why Labor is not to put to work like Capital

Seminar paper from the year 2010 in the subject Business economics - General, grade: 1,3, Humboldt-University of Berlin (Wirtschaftstheorie II (Mikro)), course: Experimental Economics, language: English, abstract: At the end I want to refer again to Fehr and Gنchter (2002). They have shown that framing has an effect on individuals behavior. A bonus pay is experienced as more friendly than being threatend to pay a fine. As we face today a financial crisis, a discussion about incentive contracts has been started immediatly. It is claimed, that incentive contracts of bankers or so called "rist-takers" have been the driving force towards the crisis. The BaFin advices the financial branch to lower the share of incentive contracts among their employees. In order to cut the bonus payment a higher fixed-wage ought to be payed. Obviously bonus payments are ment to lead to higher levels of effort, but it might be a question of definition what effort means in the short and in the long run. Since fixed-wage labor contracts are characterized by weak performance incentives, one could concider incentive contracts as the best alternative, including explicit performance incentives. But this is rather a costly action. Taking the experimental findings of Fehr et al. (2002) into account one could claim that a fixed-wage contract does better on voluntary cooperation than incentive contracts, since the highest voluntary cooperation has been observed in the trust treatment. Recently several financial institutions lowered the bonus payments and therefore induced higher fixed wage-payments. I think, if a worker already receives a "high" wage in the sense of above average wage (depending on its definition), the bonus incentive might fails to lead in a higher intertemporal effort. It makes the worker act as a risk-neutral or even riskless worker. This may not lead to a profitable outcome in the long run and it might be more profitable to pay a higher fixed wage. Additionally one can let the