Question

By showing how pay, effort and promotion are tied to each other, explain how promotions generate incentives. Does uncontrollable risk play a role for promotion incentives? Discuss whether the incentives should be stronger or weaker in the presence of measurement error.

Answer 1

Pay, effort and promotion are tied to each other as one makes efforts to get paid, payment is the incentive for one to make efforts. Also, promotion leads to higher payment , therefore one makes extra efforts to get promotion and get the higher payment and hence, promotion generates the incentive to make extra efforts and get higher payment.

Uncontrollable risk such as high blood pressure, bad cholesterol etc play role in business incentives they, if are in good condition, can promote one's work efforts but if are in bad condition can curb one's progress.

The inventive should be stronger enough to get one going despite all odds.